Chapter 18 Flashcards
(32 cards)
Reese Construction Corporation contracted to construct a building for $1,500,000. Construction began in 2007 and was completed in 2008. Data relating to the contract are summarized below:
– 12/31/07 – 12/31/08
Costs incurred – 600,000 – 450,000
Estimated costs to complete – 400,000 – —
Reese uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2007, and 2008, respectively, Reese should report gross profit of
(600,000 / (600,000 + 400,000)) × ($1,500,000 – $1,000,000) = $300,000
($1,500,000 – $1,050,000) – $300,000 = $150,000
Winsor Construction Company uses the percentage-of-completion method of accounting. In 2007, Winsor began work on a contract it had received which provided for a contract price of $15,000,000. Other details follow:
Costs incurred during the year: 7,200,000
Estimated costs to complete as of December 31: 4,800,000
Billings during the year: 6,600,000
Collections during the year: 3,900,000
What should be the gross profit recognized in 2007?
(7,200,000 / (7,200,000 + 4,800,000)) × ($15,000,000 – $12,000,000) = $1,800,000
In 2007, Crane Corporation began construction work under a three-year contract. The contract price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs 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 receivable—construction contract billings: 100,000 Construction in progress : $300,000
Less contract billings: 240,000
Costs and recognized profit in excess of billings: 60,000
Income Statement:
Income (before tax) on the contract recognized in 2007: $60,000
How much cash was collected in 2007 on this contract?
240,000 – $100,000 = $140,000
In 2007, Crane Corporation began construction work under a three-year contract. The contract price is $2,400,000. Crane uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs 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 receivable—construction contract billings: 100,000 Construction in progress : $300,000
Less contract billings: 240,000
Costs and recognized profit in excess of billings: 60,000
Income Statement:
Income (before tax) on the contract recognized in 2007: $60,000
What was the initial estimated total income before tax on this contract?
300,000 - 60,000 = 240,000
( 240,000 / x) × ($2,400,000 – x) = $60,000
x = $1,920,000
$2,400,000 – $1,920,000 = $480,000.
Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work on a contract for $3,300,000 and it was completed in 2008. Data on the costs are:
– 12/31/07 – 12/31/08
Costs incurred – $1,170,000 – $840,000
Estimated costs to complete – 780,000 – —
For the years 2007 and 2008, Eaton should recognize gross profit of
(1,170,000 / 1,950,000) × ($3,300,000 – $1,950,000) = $810,000
($3,300,000 – $2,010,000) – $810,000 = $480,000
Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of $7,200,000. Other details follow:
– 2007 – 2008
Costs incurred during the year: 1,200,000 – 3,675,000
Estimated costs to complete, as of December 31 – 3,600,000 – 0
Billings during the year – 1,350,000 – 5,400,000
Collections during the year – 900,000 – 5,850,000
Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2007 is
(1,200,000 / 4,800,000) × ($7,200,000 – $4,800,000) = $600,000
Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of $7,200,000. Other details follow:
– 2007 – 2008
Costs incurred during the year: 1,200,000 – 3,675,000
Estimated costs to complete, as of December 31 – 3,600,000 – 0
Billings during the year – 1,350,000 – 5,400,000
Collections during the year – 900,000 – 5,850,000
Assume that Ramos uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2008 is
7,200,000 – $4,875,000 = $2,325,000
Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows:
– 2007 – 2008
Costs incurred to date – $3,600,000 – $5,600,000
Estimated costs to complete 2,400,000 – —
Billings to date – 2,800,000 – 8,400,000
Collections to date – 2,000,000 – 7,200,000
If Miley uses the percentage-of-completion method, the gross profit to be recognized in 2007 is
(3,600,000 / 6,000,000) * ($8,400,000 – $6,000,000) = $1,440,000
Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows:
– 2007 – 2008
Costs incurred to date – $3,600,000 – $5,600,000
Estimated costs to complete 2,400,000 – —
Billings to date – 2,800,000 – 8,400,000
Collections to date – 2,000,000 – 7,200,000
If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is
8,400,000 – 5,600,000 = 2,800,000.
Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work on a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this contract:
– 12/31/07 – 12/31/08
Cost incurred during the year – 1,950,000 – 1,400,000
Estimated costs to complete at the end of year – 1,300,000 – —
The amount of gross profit to be recognized on the income statement for the year ended December 31, 2008 is
[1,950,000 ÷ (1,950,000 + 1,300,000)] × 2,250,000 = 1,350,000
(5,500,000 – 3,350,000) – 1,350,00 = 800,000
Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work on a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this contract:
– 12/31/07 – 12/31/08
Cost incurred during the year – 1,950,000 – 1,400,000
Estimated costs to complete at the end of year – 1,300,000 – —
If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2007 and 2008 would be
5,500,000 – $3,350,000 = $2,150,000
Willingham Construction Company uses the percentage-of-completion method. During 2007, the company entered into a fixed-price contract to construct a building for Richman Company for $30,000,000. The following details pertain to the contract:
– 12/31/07 – 12/31/08
Percentage of completion – 25% – 60%
Estimated total cost of contract – $22,500,000 – $25,000,000
Gross profit recognized to date – 1,875,000 – 3,000,000
The amount of construction costs incurred during 2008 was
(25,000,000 × .60) – (22,500,000 × .25) = 9,375,000
Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building that is expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of 2008, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000. Carter uses the percentage-of-completion method.
For the year ended December 31, 2008, Carter would recognize gross profit on the building of
(6,325,000 ÷ 13,750,000) × 1,250,000 = 575,000
Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building that is expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of 2008, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000. Carter uses the percentage-of-completion method.
At December 31, 2008, Carter would report Construction in Process in the amount of
(6,325,000 ÷ 13,750,000) × 1,250,000 = 575,000.
6,325,000 + 575,000 = $6,900.000
Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract that will take two years to complete. Data at December 31, 2007, the end of the first year, are as follows:
Costs incurred to date: $2,560,000
Estimated costs to complete: 3,280,000
Billings to date: 2,400,000
Collections to date: 2,000,000
The gross profit or loss that should be recognized for 2007 is
5,600,000 – ($2,560,000 + $3,280,000) = –$240,000
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Harber Co. uses the installment-sales method. When an account had a balance of $8,400, no further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for $2,400 as repossessed, or for $3,000 if the company spent $300 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a
8,400 – $5,880 = $2,520
($3,000 – $300) – $2,520 = $180 gain.
Yarbow Corporation has a normal gross profit on installment sales of 30%. A 2006 sale resulted in a default early in 2008. At the date of default, the balance of the installment receivable was $24,000, and the repossessed merchandise had a fair value of $13,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be
24,000 – $7,200 = $16,800
16,800 – $13,500 = $3,300 loss
Seeman Furniture uses the installment-sales method. No further collections could be made on an account with a balance of $18,000. It was estimated that the repossessed furniture could be sold as is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was
18,000 – $7,200 = $10,800
($6,300 – $300) – $10,800 = $4,800 loss
Wagner Company sold some machinery to Granger Company on January 1, 2007. The cash selling price would have been $568,620. Granger entered into an installment sales contract which required annual payments of $150,000, including interest at 10%, over five years. The first payment was due on December 31, 2007. What amount of interest income should be included in Wagner’s 2008 income statement (the second year of the contract)?
2007: $150,000 – ($568,620 × 10%) = $93,138.
2008: ($568,620 – $93,138) × 10% = $47,548
Lamberson Company has used the installment method of accounting since it began operations at the beginning of 2008. The following information pertains to its operations for 2008:
Installment sales: 1,400,000
Cost of installment sales: 980,000
Collections of installment sales: 560,000
General and administrative expenses: 140,000
The amount to be reported on the December 31, 2008 balance sheet as Deferred Gross Profit should be
[($1,400,000 – $980,000) ÷ $1,400,000] × $840,000 = $252,000
Maris, Inc. appropriately used the installment method of accounting to recognize income in its financial statement. Some pertinent data relating to this method of accounting include:
– 2007 – 2008
Installment sales – 750,000 – 900,000
Cost of sales – 450,000 – 630,000
=Gross profit – 300,000 – 270,000
Collections during year:
On 2007 sales – 250,000 – 250,000
On 2008 sales – - – 300,000
What amount to be realized gross profit should be reported on Maris’s income statement for 2008?
($300,000 ÷ $750,000) × $250,000 = $100,000
[($270,000 ÷ $900,000) × $300,000] + $100,000 = $190,000
Singer Company sells plasma-screen televisions on an installment basis and appropri-ately uses the installment-sales method of accounting. A customer with an account balance of $5,600 refuses to make any more payments and the merchandise is repossessed. The gross profit rate on the original sale is 40%. Singer estimates that the television can be sold as is for $1,750, or for $2,100 if $140 is spent to refurbish it. The loss on repossession is
[$5,600 × (1 – .40)] – ($2,100 – $140) = $1,400
During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for $2,000,000. The cash receipts related to these sales were collected as follows: 2008, $800,000; 2009, $700,000; 2010, $500,000. What is the rate of gross profit on the installment sales made by Steele Corporation during 2008?
($2,000,000 – $1,500,000) ÷ $2,000,000 = 25%
