M6-16 Using Percentage-of-Completion and Completed Contract Methods Halsey Building Company signed a contract to build an office building for $40,000,000. The scheduled construction costs follow. Year Cost 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000,000 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000,000 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000,000 The building is completed in 2018.For each year, compute the revenue, expense, and gross profit reported for this construction project using each of the following methods. a. Percentage-of-completion method b. Completed contract method M6-17 Explaining Revenue Recognition and Bundled Sales A.J. Smith Electronics is a retail consumer electronics company that also sells extended warranty contracts for many of the products that it carries. The extended warranty provides coverage for three years beyond the expiration of the manufacturer’s warranty. In 2016, A.J. Smith sold extended warranties amounting to $1,700,000. The warranty coverage for all of these begins in 2017 and runs through 2019. The total expected cost of providing warranty services on these contracts is $500,000. a. How should A.J. Smith recognize revenue on the extended warranty contracts? b. Estimate the revenue, expense, and gross profit reported from these contracts in the year(s) that the revenue is recognized. c. In 2017, as a special promotion, A.J. Smith sold a digital camera (retail price $300), a digital photograph printer (retail price $125), and an extended warranty contract for each (total retail price $75) as a package for a special price of $399. The extended warranty covers the period from 2018 through 2020. The company sold 200 of these camera–printer packages. Compute the revenue that A.J. Smith should recognize in each year from 2017 through 2020 M7-17 Calculating Effect of Inventory Errors For each of the following scenarios, determine the effect of the error on income in the current period and in the subsequent period. To answer these questions, rely on the inventory equation: Beginning inventory + Purchases - Cost of goods sold = Ending inventory a. Porter Company received a shipment of merchandise costing $32,000 near the end of the fiscal year. The shipment was mistakenly recorded at a cost of $23,000. b. Chiu, Inc., purchased merchandise costing $16,000. When the shipment was received, it was determined that the merchandise was damaged in shipment. The goods were returned to the supplier, but the accounting department was not notified and the invoice was paid. c. After taking a physical count of its inventory, Murray Corporation determined that it had “shrink” of $12,500, and the books were adjusted accordingly. However, inventory costing $5,000 was never counted E7-27 Computing Cost of Sales and Ending Inventory Stocken Company has the following financial records for the current period: Units Unit Cost Cost Beginning inventory 1,000 $20 $20,000 Purchases #1 1,800 $22 $39,600 Purchases #2 800 $26 $20,800 Purchases #3 1,200 $29 $34,800 Ending inventory at the end of this period is 350 units. Compute the ending inventory and the cost of goods sold for the current period using (a) first-in, first-out, (b) average cost, and (c) last-in, first-out E7-28 Determining Lower of Cost or Market Crane Company had the following inventory at December 31, 2017 Unit Price Quantity Cost Market Desks Model 9001 70 $190 $210 Model 9002 45 $280 $268 Model 9003 20 $350 $360 Cabinets Model 7001 120 $60 $64 Model 7002 80 $95 $88 Model 7003 50 $130 $126 a. Determine the ending inventory amount by applying the lower of cost or market rule to 1. Each item of inventory. 2. Each major category of inventory. 3. Total inventory. b. Which of the LCM procedures from requirement a results in the lowest net income for 2017? Explain
M6-16 Using Percentage-of-Completion and Completed Contract Methods Halsey Building Company signed a contract to build an office building for $40,000,000. The scheduled construction costs follow. Year Cost 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000,000 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000,000 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000,000 The building is completed in 2018.For each year, compute the revenue, expense, and gross profit reported for this construction project using each of the following methods. a. Percentage-of-completion method b. Completed contract method
M6-17 Explaining Revenue Recognition and Bundled Sales A.J. Smith Electronics is a retail consumer electronics company that also sells extended warranty contracts for many of the products that it carries. The extended warranty provides coverage for three years beyond the expiration of the manufacturer’s warranty. In 2016, A.J. Smith sold extended warranties amounting to $1,700,000. The warranty coverage for all of these begins in 2017 and runs through 2019. The total expected cost of providing warranty services on these contracts is $500,000. a. How should A.J. Smith recognize revenue on the extended warranty contracts? b. Estimate the revenue, expense, and gross profit reported from these contracts in the year(s) that the revenue is recognized. c. In 2017, as a special promotion, A.J. Smith sold a digital camera (retail price $300), a digital photograph printer (retail price $125), and an extended warranty contract for each (total retail price $75) as a package for a special price of $399. The extended warranty covers the period from 2018 through 2020. The company sold 200 of these camera–printer packages. Compute the revenue that A.J. Smith should recognize in each year from 2017 through 2020
M7-17 Calculating Effect of Inventory Errors For each of the following scenarios, determine the effect of the error on income in the current period and in the subsequent period. To answer these questions, rely on the inventory equation: Beginning inventory + Purchases - Cost of goods sold = Ending inventory a. Porter Company received a shipment of merchandise costing $32,000 near the end of the fiscal year. The shipment was mistakenly recorded at a cost of $23,000.
b. Chiu, Inc., purchased merchandise costing $16,000. When the shipment was received, it was determined that the merchandise was damaged in shipment. The goods were returned to the supplier, but the accounting department was not notified and the invoice was paid. c. After taking a physical count of its inventory, Murray Corporation determined that it had “shrink” of $12,500, and the books were adjusted accordingly. However, inventory costing $5,000 was never counted
E7-27 Computing Cost of Sales and Ending Inventory Stocken Company has the following financial records for the current period:
Units Unit Cost Cost Beginning inventory 1,000 $20 $20,000 Purchases #1 1,800 $22 $39,600 Purchases #2 800 $26 $20,800 Purchases #3 1,200 $29 $34,800
Ending inventory at the end of this period is 350 units. Compute the ending inventory and the cost of goods sold for the current period using (a) first-in, first-out, (b) average cost, and (c) last-in, first-out
E7-28 Determining Lower of Cost or Market Crane Company had the following inventory at December 31, 2017
Unit Price Quantity Cost Market Desks Model 9001 70 $190 $210 Model 9002 45 $280 $268 Model 9003 20 $350 $360 Cabinets Model 7001 120 $60 $64 Model 7002 80 $95 $88 Model 7003 50 $130 $126
a. Determine the ending inventory amount by applying the lower of cost or market rule to 1. Each item of inventory. 2. Each major category of inventory. 3. Total inventory. b. Which of the LCM procedures from requirement a results in the lowest net income for 2017? Explain
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