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Exercise 5-2
2006 To record installment salesInstallment receivables................................................... 360,000
Inventory..................................................................... 234,000Deferred gross profit................................................... 126,000
2006 To record cash collections from installment salesCash................................................................................ 150,000
Installment receivables............................................... 150,000
2006 To recognize gross profit from installment salesDeferred gross profit....................................................... 52,500
Realized gross profit................................................... 52,500
2007 To record installment salesInstallment receivables................................................... 350,000
Inventory..................................................................... 245,000Deferred gross profit................................................... 105,000
2007 To record cash collections from installment salesCash................................................................................ 220,000
Installment receivables............................................... 220,000
2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 71,000
Realized gross profit................................................... 71,000
Exercise 5-7Requirement 1
2006 2007Contract price $2,000,000 $2,000,000Actual costs to date 300,000 1,875,000Estimated costs to complete 1,200,000 - 0 -
Total estimated costs 1,500,000 1,875,000Gross profit (estimated in 2006) $ 500,000 $ 125,000
Gross profit recognition:2006: $ 300,000
= 20% x $500,000 = $100,000$1,500,000
2007: $125,000 - $100,000 = $25,000
Requirement 22006 $ - 0 -2007 $125,000
Requirement 3
Balance SheetAt December 31, 2006
Current assets:Accounts receivable $ 130,000Costs and profit ($400,000*) in excess of billings ($380,000) 20,000
* Costs ($300,000) + profit ($100,000)
Exercise 5-7 (concluded)
Requirement 4
Balance SheetAt December 31, 2006
Current assets:Accounts receivable $ 130,000
Current liabilities:Billings ($380,000) in excess of costs ($300,000) $ 80,000
Problem 5-2Requirement 1
2006 Cost recovery % :
$180,000 = 60% (gross profit % = 40%)
$300,000
2007 Cost recovery %:
$280,000 = 70% (gross profit % = 30%)
$400,000
2006 gross profit:
Cash collection from 2006 sales = $120,000 x 40% = $48,000
2007 gross profit:
Cash collection from 2006 sales = $100,000 x 40% = $ 40,000 + Cash collection from 2007 sales = $150,000 x 30% = 45,000
Total 2007 gross profit $85,000
Requirement 2
2006 To record installment salesInstallment receivables................................................... 300,000
Inventory..................................................................... 180,000Deferred gross profit................................................... 120,000
2006 To record cash collections from installment salesCash................................................................................ 120,000
Installment receivables............................................... 120,000
2006 To recognize gross profit from installment salesDeferred gross profit....................................................... 48,000
Realized gross profit................................................... 48,000
Problem 5-2 (continued)
2007 To record installment salesInstallment receivables................................................... 400,000
Inventory..................................................................... 280,000Deferred gross profit................................................... 120,000
2007 To record cash collections from installment salesCash................................................................................ 250,000
Installment receivables............................................... 250,000
2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 85,000
Realized gross profit................................................... 85,000
Requirement 3
Date Cash Collected Cost Recovery Gross Profit
20062006 sales $120,000 $120,000 - 0 -
20072006 sales $100,000 $ 60,000 $40,0002007 sales 150,000 150,000 - 0 -
2007 totals $250,000 $210,000 $40,000
Problem 5-2 (concluded)
2006 To record installment salesInstallment receivables................................................... 300,000
Inventory..................................................................... 180,000Deferred gross profit................................................... 120,000
2006 To record cash collection from installment salesCash................................................................................ 120,000
Installment receivables............................................... 120,000
2007 To record installment salesInstallment receivables................................................... 400,000
Inventory..................................................................... 280,000Deferred gross profit................................................... 120,000
2007 To record cash collection from installment salesCash................................................................................ 250,000
Installment receivables............................................... 250,000
2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 40,000
Realized gross profit................................................... 40,000
Problem 5-3Requirement 1Total profit = $500,000 - 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%
8/31/06 8/31/07 8/31/08 8/31/09 8/31/10
Cash collections $100,000 $100,000 $100,000 $100,000 $100,000
a. Point of delivery method $200,000 - 0 - - 0 - - 0 - - 0 -
b. Installment sales method (40% x cash collected) $ 40,000 $ 40,000 $ 40,000 $ 40,000 $40,000
c. Cost recovery method - 0 - - 0 - - 0 - $100,000 $100,000
Problem 5-3 (continued)
Requirement 2
Point of Delivery
Installment Sales Cost Recovery
Installment receivable 500,000 Sales revenue 500,000Cost of goods sold 300,000 Inventory 300,000To record sale on 8/31/06.
Installment receivable 500,000 500,000 Inventory 300,000 300,000 Deferred gross profitTo record sale on 8/31/06.
200,000 200,000
Cash 100,000 100,000 100,000 Installment receivable 100,000 100,000 100,000Entry made each Aug. 31.
Deferred gross profit 40,000 Realized gross profitTo record gross profit.(entry made each Aug. 31)
40,000
Deferred gross profit 100,000 Realized gross profitTo record gross profit.(entry made 8/31/09 & 8/31/10)
100,000
Problem 5-3 (concluded)
Requirement 3
Point of Delivery
Installment Sales
Cost Recovery
December 31, 2006AssetsInstallment receivablesLess: Deferred gross profitInstallment receivables, net
400,000 400,000(160,000)240,000
400,000(200,000)200,000
December 31, 2007AssetsInstallment receivablesLess: Deferred gross profitInstallment receivables, net
300,000 300,000(120,000)180,000
300,000(200,000)100,000
Problem 5-4Requirement 1
2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,000,000 8,200,000Estimated costs to complete 5,600,000 2,000,000 - 0 - Total estimated costs 8,000,000 8,000,000 8,200,000Estimated gross profit (loss) (actual in 2008) $ 2,000,000 $ 2,000,000 $ 1,800,000
Gross profit (loss) recognition:
2006: $2,400,000 = 30.0% x $2,000,000 = $600,000$8,000,000
2007: $6,000,000 = 75.0% x $2,000,000 = $1,500,000 - 600,000 = $900,000$8,000,000
2008: $1,800,000 - 1,500,000 = $300,000
Requirement 2
2006 2007 2008
Construction in progress 2,400,000 3,600,000 2,200,000 Various accounts 2,400,000 3,600,000 2,200,000To record construction costs.
Accounts receivable 2,000,000 4,000,000 4,000,000 Billings on construction contract 2,000,000 4,000,000 4,000,000To record progress billings.
Cash 1,800,000 3,600,000 4,600,000 Accounts receivable 1,800,000 3,600,000 4,600,000To record cash collections.
Construction in progress (gross profit) 600,000 900,000 300,000Cost of construction (cost incurred) 2,400,000 3,600,000 2,200,000 Revenue from long-term contracts (1) 3,000,000 4,500,000 2,500,000To record gross profit.
Problem 5-4 (continued)
(1) Revenue recognized:2006: 30% x $10,000,000 = $3,000,0002007: 75% x $10,000,000 = $7,500,000
Less: Revenue recognized in 2006 (3,000,000)Revenue recognized in 2007 $4,500,0002008: 100% x $10,000,000 = $10,000,000
Less: Revenue recognized in 2006 & 2007 (7,500,000)Revenue recognized in 2008 $2,500,000
Requirement 3
Balance Sheet 2006 2007
Current assets:Accounts receivable $ 200,000 $600,000Construction in progress $3,000,000 $7,500,000
Less: Billings (2,000,000 ) (6,000,000 )Costs and profit in excess of billings 1,000,000 1,500,000
Requirement 42006 2007 2008
Costs incurred during the year $2,400,000 $3,800,000 $3,200,000Estimated costs to complete
as of year-end 5,600,000 3,100,000 -
2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,200,000 9,400,000Estimated costs to complete 5,600,000 3,100,000 - 0 - Total estimated costs 8,000,000 9,300,000 9,400,000Estimated gross profit (actual in 2008) $ 2,000,000 $ 700,000 $ 600,000
Problem 5-4 (concluded)
Gross profit (loss) recognition:2006: $2,400,000
= 30.0% x $2,000,000 = $600,000$8,000,000
2007: $6,200,000 = 66.6667% x $700,000 = $466,667 - 600,000 = $(133,333)$9,300,000
2008: $600,000 - 466,667 = $133,333
Requirement 52006 2007 2008
Costs incurred during the year $2,400,000 $3,800,000 $3,900,000Estimated costs to complete
as of year-end 5,600,000 4,100,000 -
2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,200,000 10,100,000Estimated costs to complete 5,600,000 4,100,000 - 0 - Total estimated costs 8,000,000 10,300,000 10,100,000Estimated gross profit (loss) (actual in 2008) $ 2,000,000 $ (300,000 ) $ (100,000 )
Gross profit (loss) recognition:
2006: $2,400,000 = 30.0% x $2,000,000 = $600,000
$8,000,000
2007: $(300,000) - 600,000 = $(900,000)
2008: $(100,000) - (300,000) = $200,000
Problem 5-7Requirement 1a. January 30, 2006
Cash ............................................................................... 200,000Note receivable .............................................................. 1,000,000
Unearned franchise fee revenue..................................1,200,000
b. September 1, 2006
Unearned franchise fee revenue...................................... 1,200,000Franchise fee revenue ................................................1,200,000
c. September 30, 2006
Accounts receivable ($40,000 x 3%) ................................. 1,200Service revenue .......................................................... 1,200
d. January 30, 2007
Cash................................................................................ 100,000Note receivable .......................................................... 100,000
Problem 5-7 (concluded)
Requirement 2a. January 30, 2006
Cash ............................................................................... 200,000Note receivable .............................................................. 1,000,000
Deferred franchise fee revenue...................................1,200,000
b. September 1, 2006
Deferred franchise fee revenue ...................................... 200,000Franchise fee revenue (cash collected)........................... 200,000
c. September 30, 2006
Accounts receivable ($40,000 x 3%) ................................. 1,200Service revenue .......................................................... 1,200
d. January 30, 2007
Cash................................................................................ 100,000Note receivable .......................................................... 100,000
Deferred franchise fee revenue ...................................... 100,000Franchise fee revenue ................................................ 100,000