Chapter 18

Question 1

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

Answer 1

(600,000 / (600,000 + 400,000)) × ($1,500,000 – $1,000,000) = $300,000
($1,500,000 – $1,050,000) – $300,000 = $150,000

Question 2

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?

Answer 2

(7,200,000 / (7,200,000 + 4,800,000)) × ($15,000,000 – $12,000,000) = $1,800,000

Question 3

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?

Answer 3

240,000 – $100,000 = $140,000

Question 4

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?

Answer 4

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.

Question 5

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

Answer 5

(1,170,000 / 1,950,000) × ($3,300,000 – $1,950,000) = $810,000
($3,300,000 – $2,010,000) – $810,000 = $480,000

Question 6

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

Answer 6

(1,200,000 / 4,800,000) × ($7,200,000 – $4,800,000) = $600,000

Question 7

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

Answer 7

7,200,000 – $4,875,000 = $2,325,000

Question 8

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

Answer 8

(3,600,000 / 6,000,000) * ($8,400,000 – $6,000,000) = $1,440,000

Question 9

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

Answer 9

8,400,000 – 5,600,000 = 2,800,000.

Question 10

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

Answer 10

[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

Question 11

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

Answer 11

5,500,000 – $3,350,000 = $2,150,000

Question 12

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

Answer 12

(25,000,000 × .60) – (22,500,000 × .25) = 9,375,000

Question 13

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

Answer 13

(6,325,000 ÷ 13,750,000) × 1,250,000 = 575,000

Question 14

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

Answer 14

(6,325,000 ÷ 13,750,000) × 1,250,000 = 575,000.
6,325,000 + 575,000 = $6,900.000

Question 15

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

Answer 15

5,600,000 – ($2,560,000 + $3,280,000) = –$240,000

Question 16

Skipped 76-78

Answer 16

https://www.studocu.com/vn/document/dai-hoc-ha-noi/accounting/test-bank-with-answers-intermediate-accounting-12e-by-kieso-chapter-18/4505656

Question 17

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

Answer 17

8,400 – $5,880 = $2,520
($3,000 – $300) – $2,520 = $180 gain.

Question 18

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

Answer 18

24,000 – $7,200 = $16,800
16,800 – $13,500 = $3,300 loss

Question 19

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

Answer 19

18,000 – $7,200 = $10,800
($6,300 – $300) – $10,800 = $4,800 loss

Question 20

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)?

Answer 20

2007: $150,000 – ($568,620 × 10%) = $93,138.
2008: ($568,620 – $93,138) × 10% = $47,548

Question 21

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

Answer 21

[($1,400,000 – $980,000) ÷ $1,400,000] × $840,000 = $252,000

Question 22

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?

Answer 22

($300,000 ÷ $750,000) × $250,000 = $100,000
[($270,000 ÷ $900,000) × $300,000] + $100,000 = $190,000

Question 23

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

Answer 23

[$5,600 × (1 – .40)] – ($2,100 – $140) = $1,400

Question 24

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?

Answer 24

($2,000,000 – $1,500,000) ÷ $2,000,000 = 25%

Question 25

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. If expenses, other than the cost of the merchandise sold, related to the 2008 installment sales amounted to $90,000, by what amount would Steele’s net income for 2008 increase as a result of installment sales?

Answer 25

($800,000 × .25) – $90,000 = $110,000

Question 26

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 amount would be shown in the December 31, 2009 financial statement for realized gross profit on 2008 installment sales, and deferred gross profit on 2008 installment sales, respectively?

Answer 26

700,000 × .25 = $175,000
500,000 × .25 = $125,000

Question 27

On January 1, 2007, Dole Co. sold land that cost $210,000 for $280,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $112,595 starting on December 31, 2007. Because collection of the note is very uncertain, Dole will use the cost-recovery method. How much revenue from this sale should Dole recognize in 2007?

Answer 27

0

Question 28

On April 1, 2007 Reagan, Inc. entered into a franchise agreement with a local business-man. The franchisee paid $240,000 and gave a $160,000, 8%, 3-year note payable with interest due annually on March 31. Reagan recorded the $400,000 initial franchise fee as revenue on April 1, 2007. On December 30, 2007, the franchisee decided not to open an outlet under Reagan’s name. Reagan canceled the franchisee’s note and refunded $128,000, less accrued interest on the note, of the $240,000 paid on April 1. What entry should Reagan make on December 30, 2007?

Answer 28

Debit Revenue = $400,000
Credit Interest income = $160,000 × 8% × 9/12 = $9,600
Credit Cash = $128,000 – $9,600 = $118,400
Credit Repossession revenue: $240,000 – $128,000 = $112,000.

Question 29

On January 1, 2007 Tasty Delight, Inc. entered into a franchise agreement with a company allowing the company to do business under Tasty Delight’s name. Tasty Delight had performed substantially all required services by January 1, 2007, and the franchisee paid the initial franchise fee of $560,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of $48,000 annually, of which 20% must be spent on advertising by Tasty Delight. What entry should Tasty Delight make on January 1, 2007 to record receipt of the initial franchise fee and the continuing franchise fee for 2007?

Answer 29

Debit Cash = $560,000 + $48,000 = $608,000
Credit Franchise Fee Revenue = $560,000
Credit Unearned Franchise Fees = $48,000 × 20% = $9,600
Credit Revenue from Continuing
Franchise Fees = $48,000 – $9,600 = $38,400

Question 30

Yount Inc. charges an initial franchise fee of $920,000, with $200,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is $545,872. The franchisee has the option to purchase $120,000 of equipment for $96,000. Yount has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is

Answer 30

200,000 + $545,872 – $24,000 = $721,872

Question 31

On May 1, 2007, TV Inc. consigned 80 TVs to Al’s TV. The TVs cost $270. Freight on the shipment paid by Al’s TV was $600. On July 10, TV Inc. received an account sales and $12,900 from Al’s TV. Thirty TVs had been sold and the following expenses were deducted:
Freight $600
Commission (20% of sales price) ?
Advertising 390
Delivery 210
The total sales price of the TVs sold by AL’s TV was

Answer 31

Sales – (Sales × 20%) – $600 – $390 – $210 = $12,900
.8 Sales = $14,100
Sales = $17,625

Question 32

On May 1, 2007, TV Inc. consigned 80 TVs to Al’s TV. The TVs cost $270. Freight on the shipment paid by Al’s TV was $600. On July 10, TV Inc. received an account sales and $12,900 from Al’s TV. Thirty TVs had been sold and the following expenses were deducted:
Freight $600
Commission (20% of sales price) ?
Advertising 390
Delivery 210
The inventory of TVs will be reported on whose balance sheet and at what amount

Answer 32

($270 × 50) + [($600 ÷ 80) × 50] = $13,875