Chapter 1 Environment and Theoretical Structure of

Financial Accounting

Exercise 111
1. The historical cost (original transaction value) principle
2. The periodicity assumption
3. Revenue recognition
4. The economic entity assumption
5. Expense recognition; materiality
6. The full disclosure principle

Research Case 14
1. Requirement 1
2. The IASB is committed to developing, in the public interest, a single set of
high-quality, understandable, and enforceable global accounting standards
that require transparent and comparable information in general purpose
financial statements. In addition, the IASB cooperates with national
accounting standard-setters to achieve convergence in accounting standards
around the world.
3. Requirement 2
4. The IASB has 16 Board members, each with one vote.
5. Requirement 3
6. The answers to this question will vary depending on the date the research is
conducted. In 2014, the chairman of the IASB was Hans Hoogervorst.
7. Requirement 4
8. London, United Kingdom
Problem 23
1. Depreciation expense ................................................. 10,000
Accumulated depreciation ..................................... 10,000
2. Salaries and wages expense ....................................... 1,500
Salaries and wages payable ................................... 1,500
3. Interest expense ($50,000 x 12% x 3/12)......................... 1,500
Interest payable ...................................................... 1,500
4. Interest receivable ($20,000 x 8% x 10/12) ..................... 1,333
Interest revenue ...................................................... 1,333
5. Prepaid insurance ($6,000 x 15/24) ................................ 3,750
Insurance expense .................................................. 3,750
6. Supplies expense ($1,500 800) .................................. 700
Supplies .................................................................. 700
7. Sales revenue ............................................................. 2,000
Deferred revenue.................................................... 2,000
8. Rent expense .............................................................. 1,000
Prepaid rent ........................................................... 1,000
Problem 24
Requirements 1 and 2
BALANCE SHEET ACCOUNTS
Cash Accounts receivable
_____________________________________ ______________________________________
Bal. 30,000 Bal. 40,000
___________________ ___________________
12/31 Bal. 30,000 12/31 Bal. 40,000

Prepaid rent
_____________________________________
Bal. 2,000
1,000 8.
___________________
12/31 Bal. 1,000

Prepaid insurance Supplies

_____________________________________ ______________________________________
Bal. 0 Bal. 1,500
5. 3,750 700 6.
___________________ ___________________
12/31 Bal. 3,750 12/31 Bal. 800

Inventory Note receivable

_____________________________________ ______________________________________
Bal. 60,000 Bal. 20,000
___________________ ___________________
12/31 Bal. 60,000 12/31 Bal. 20,000

Office equipment Interest receivable

_____________________________________ ______________________________________
Bal. 80,000 Bal. 0
4. 1,333
___________________ ___________________
12/31 Bal. 80,000 12/31 Bal. 1,333
Problem 24 (continued)

Accumulated depreciation Accounts payable

_____________________________________ ______________________________________
30,000 Bal. 31,000 Bal.
10,000 1.
___________________ ___________________
40,000 12/31 Bal. 31,000 12/31 Bal.

Salaries and wages payable Note payable

_____________________________________ ______________________________________
0 Bal. 50,000 Bal.
1,500 2.
___________________ ___________________
1,500 12/31 Bal. 50,000 12/31 Bal.

Interest payable Deferred revenue

_____________________________________ ______________________________________
0 Bal. 0 Bal.
1,500 3. 2,000 7.
___________________ ___________________
1,500 12/31 Bal. 2,000 12/31 Bal.

Common stock Retained earnings

_____________________________________ ______________________________________
60,000 Bal. 24,500 Bal.
___________________ ___________________
60,000 12/31 Bal. 24,500 12/31 Bal.
Problem 24 (continued)
INCOME STATEMENT ACCOUNTS
Sales revenue Interest revenue
_____________________________________ ______________________________________
148,000 Bal. 0 Bal.
7. 2,000 1,333 4.
___________________ ___________________
146,000 12/31 Bal. 1,333 12/31 Bal.

Cost of goods sold Salaries and wages expense

_____________________________________ ______________________________________
Bal. 70,000 Bal. 18,900
2. 1,500
___________________ ___________________
12/31 Bal. 70,000 12/31 Bal. 20,400

Rent expense Depreciation expense

_____________________________________ ______________________________________
Bal. 11,000 Bal. 0
8. 1,000 1. 10,000
___________________ ___________________
12/31 Bal. 12,000 12/31 Bal. 10,000

Interest expense Supplies expense

_____________________________________ ______________________________________
Bal. 0 Bal. 1,100
3. 1,500 6. 700
___________________ ___________________
12/31 Bal. 1,500 12/31 Bal. 1,800

Insurance expense Advertising expense

_____________________________________ ______________________________________
Bal. 6,000 Bal. 3,000
3,750 5.
___________________ ___________________
12/31 Bal. 2,250 12/31 Bal. 3,000
Problem 24 (continued)
Requirement 3

Account Title Debits Credits

Cash 30,000
Accounts receivable 40,000
Prepaid rent 1,000
Prepaid insurance 3,750
Supplies 800
Inventory 60,000
Note receivable 20,000
Interest receivable 1,333
Office equipment 80,000
Accumulated depreciationoffice
equipment 40,000
Accounts payable 31,000
Salaries and wages payable 1,500
Note payable 50,000
Interest payable 1,500
Deferred revenue 2,000
Common stock 60,000
Retained earnings 24,500
Sales revenue 146,000
Interest revenue 1,333
Cost of goods sold 70,000
Salaries and wages expense 20,400
Rent expense 12,000
Depreciation expense 10,000
Interest expense 1,500
Supplies expense 1,800
Insurance expense 2,250
Advertising expense 3,000 ______
Totals 357,833 357,833
Problem 24 (continued)
Requirement 4

PASTINA COMPANY
Income Statement
For the Year Ended December 31, 2016

Sales revenue ...................................................... $146,000

Cost of goods sold ............................................. 70,000
Gross profit .......................................................... 76,000

Operating expenses:
Salaries and wages........................................ $20,400
Rent .................................................................... 12,000
Depreciation .................................................... 10,000
Supplies ............................................................ 1,800
Insurance ......................................................... 2,250
Advertising ...................................................... 3,000
Total operating expenses .................. 49,450
Operating income 26,550
Other income (expense):
Interest revenue .......................................... 1,333
Interest expense ............................................ (1,500) (167)
Net income ........................................................... $ 26,383
Problem 24 (continued)

PASTINA COMPANY
Statement of Shareholders' Equity
For the Year Ended December 31, 2016

Total
Common Retained Shareholders
Stock Earnings Equity
Balance at January 1, 2016 $60,000 $28,500 $ 88,500

Issue of common stock -0- -0-

Net income for 2016 26,383 26,383
Less: Dividends ______ (4,000) (4,000)
Balance at December 31, 2016 $60,000 $50,883 $110,883
Problem 24 (continued)

PASTINA COMPANY
Balance Sheet
At December 31, 2016
Assets
Current assets:
Cash ........................................................................ $ 30,000
Accounts receivable ......................................... 40,000
Supplies ................................................................. 800
Inventory .............................................................. 60,000
Note receivable .................................................. 20,000
Interest receivable ........................................... 1,333
Prepaid rent ........................................................ 1,000
Prepaid insurance ............................................ 3,750
Total current assets .................................... 156,883

Office equipment .................................................. $80,000

Less: Accumulated depreciation ................ (40,000) 40,000
Total assets .................................................. $196,883

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable ................................................ $ 31,000
Salaries and wages payable ............................ 1,500
Note payable ........................................................ 50,000
Interest payable .................................................. 1,500
Deferred revenue ................................................ 2,000
Total current liabilities ................................ 86,000

Shareholders equity:
Common stock ..................................................... $60,000
Retained earnings ............................................... 50,883
Total shareholders equity ......................... 110,883
Total liabilities and shareholders $196,883
equity
Problem 24 (continued)
Requirement 5

December 31, 2016

Sales revenue................................................................... 146,000
Interest revenue ............................................................... 1,333
Income summary ......................................................... 147,333

Income summary ............................................................. 120,950

Cost of goods sold ....................................................... 70,000
Salaries and wages expense ........................................ 20,400
Rent expense ............................................................... 12,000
Depreciation expense .................................................. 10,000
Interest expense ........................................................... 1,500
Supplies expense ........................................................ 1,800
Insurance expense ....................................................... 2,250
Advertising expense .................................................... 3,000

Income summary ($147,333 120,950) .............................. 26,383

Retained earnings ........................................................ 26,383
Problem 24 (continued)

Sales revenue Interest revenue

_____________________________________ ______________________________________
148,000 Bal. 0 Bal.
7. 2,000 1,333 4.
Closing 146,000 Closing 1,333
___________________ ___________________
0 12/31 Bal. 0 12/31 Bal.

Cost of goods sold Salaries and wages expense

_____________________________________ ______________________________________
Bal. 70,000 Bal. 18,900
4. 1,500
70,000 Closing 20,400 Closing
___________________ ___________________
12/31 Bal. 0 12/31 Bal. 0

Rent expense Depreciation expense

_____________________________________ ______________________________________
Bal. 11,000 Bal. 0
8. 1,000 1. 10,000
12,000 Closing 10,000 Closing
___________________ ___________________
12/31 Bal. 0 12/31 Bal. 0

Interest expense Supplies expense

_____________________________________ ______________________________________
Bal. 0 Bal. 1,100
3. 1,500 6. 700
1,500 Closing 1,800 Closing
___________________ ___________________
12/31 Bal. 0 12/31 Bal. 0
Problem 24 (continued)

Insurance expense Advertising expense

_____________________________________ ______________________________________
Bal. 6,000 Bal. 3,000
3,750 5.
2,250 Closing 3,000 Closing
___________________ ___________________
12/31 Bal. 0 12/31 Bal. 0

Income summary Retained earnings

_____________________________________ ______________________________________
Bal. 0 24,500 Bal.
147,333 Closing
Closing 120,950
Closing 26,383 26,383 Closing
___________________ ___________________
12/31 Bal. 0 50,883 12/31 Bal.
Problem 24 (concluded)
Requirement 6

Account Title Debits Credits

Cash 30,000
Accounts receivable 40,000
Prepaid rent 1,000
Prepaid insurance 3,750
Supplies 800
Inventory 60,000
Note receivable 20,000
Interest receivable 1,333
Office equipment 80,000
Accumulated depreciationoffice
equipment 40,000
Accounts payable 31,000
Salaries and wages payable 1,500
Note payable 50,000
Interest payable 1,500
Deferred revenue 2,000
Common stock 60,000
Retained earnings _______ 50,883
Totals 236,883 236,883
Problem 26
Requirement 2
a. Cash............................................................................ 70,000
Accounts receivable .................................................. 30,000
Service revenue ...................................................... 100,000
b. Cash............................................................................ 27,300
Accounts receivable ............................................... 27,300
c. Cash............................................................................ 10,000
Common stock ....................................................... 10,000
d. Salaries expense ........................................................ 41,000
Salaries payable ........................................................ 9,000
Cash........................................................................ 50,000
e. Miscellaneous expenses ............................................. 24,000
Cash........................................................................ 24,000
f. Equipment .................................................................. 15,000
Cash........................................................................ 15,000
g. Retained earnings ...................................................... 2,500
Cash........................................................................ 2,500
Problem 26 (continued)
Requirements 1 and 3
BALANCE SHEET ACCOUNTS
Cash Accounts receivable
_____________________________________ ______________________________________
1/1 Bal. 30,000 1/1 Bal. 15,000
a. 70,000 50,000 d. a. 30,000 27,300 b.
b. 27,300 24,000 e.
c. 10,000 15,000 f.
2,500 g.
___________________ ___________________
12/31 Bal. 45,800 12/31 Bal. 17,700

Equipment
_____________________________________
1/1 Bal. 20,000
f. 15,000
___________________
12/31 Bal. 35,000

Accumulated depreciation Salaries payable

_____________________________________ ______________________________________
6,000 1/1 Bal. 9,000 1/1 Bal.
d. 9,000
___________________ ___________________
6,000 12/31 Bal. 0 12/31 Bal.

Common stock Retained earnings

_____________________________________ ______________________________________
40,500 1/1 Bal. 9,500 1/1 Bal.
10,000 c. g. 2,500

___________________ ___________________
50,500 12/31 Bal. 7,000 12/31 Bal.
Problem 26 (continued)

INCOME STATEMENT ACCOUNTS

Service revenue Miscellaneous expenses
_____________________________________ ______________________________________
0 1/1 Bal. 1/1 Bal. 0
100,000 a. e. 24,000
___________________ ___________________
100,000 12/31 Bal. 12/31 Bal. 24,000

Salaries expense
_____________________________________
1/1 Bal. 0
d. 41,000
___________________
12/31 Bal. 41,000

Requirement 4

Account Title Debits Credits

Cash 45,800
Accounts receivable 17,700
Equipment 35,000
Accumulated depreciation 6,000
Salaries payable -0-
Common stock 50,500
Retained earnings 7,000
Service revenue 100,000
Salaries expense 41,000
Miscellaneous expenses 24,000 ______
Totals 163,500 163,500
Problem 26 (continued)
Requirement 5

Salaries expense .............................................................. 1,000

Salaries payable........................................................... 1,000

Depreciation expense ...................................................... 2,000

Accumulated depreciation .......................................... 2,000
Problem 26 (continued)
BALANCE SHEET ACCOUNTS
Cash Accounts receivable
_____________________________________ ______________________________________
1/1 Bal. 30,000 1/1 Bal. 15,000
a. 70,000 50,000 d. a. 30,000 27,300 b.
b. 27,300 24,000 e.
c. 10,000 15,000 f.
2,500 g.
___________________ ___________________
12/31 Bal. 45,800 12/31 Bal. 17,700

Equipment
_____________________________________
1/1 Bal. 20,000
f. 15,000
___________________
12/31 Bal. 35,000

Accumulated depreciation Salaries payable

_____________________________________ ______________________________________
6,000 1/1 Bal. 9,000 1/1 Bal.
2,000 Adjusting d. 9,000 1,000 Adjusting
___________________ ___________________
8,000 12/31 Bal. 1,000 12/31 Bal.

Common stock Retained earnings

_____________________________________ ______________________________________
40,500 1/1 Bal. 9,500 1/1 Bal.
10,000 c. g. 2,500

___________________ ___________________
50,500 12/31 Bal. 7,000 12/31 Bal.
Problem 26 (continued)

INCOME STATEMENT ACCOUNTS

Service revenue Miscellaneous expenses
_____________________________________ ______________________________________
0 1/1 Bal. 1/1 Bal. 0
100,000 a. e. 24,000
___________________ ___________________
100,000 12/31 Bal. 12/31 Bal. 24,000

Depreciation expense
_____________________________________
1/1 Bal. 0
Adjusting 2,000
___________________
12/31 Bal. 2,000

Salaries expense
_____________________________________
1/1 Bal. 0
d. 41,000
Adjusting 1,000
___________________
12/31 Bal. 42,000
Problem 26 (continued)
Requirement 6

Account Title Debits Credits

Cash 45,800
Accounts receivable 17,700
Equipment 35,000
Accumulated depreciation 8,000
Salaries payable 1,000
Common stock 50,500
Retained earnings 7,000
Service revenue 100,000
Salaries expense 42,000
Miscellaneous expenses 24,000
Depreciation expense 2,000 ______
Totals 166,500 166,500
Problem 28
1. Depreciation expense ($75,000 8 years) ..................... 9,375
Accumulated depreciation ..................................... 9,375
2. Salaries and wages expense ($4,500 3,000) ............... 1,500
Salaries and wages payable ................................... 1,500
3. Interest expense ($30,000 x 10% x 4/12) ......................... 1,000
Interest payable ...................................................... 1,000
4. Supplies ...................................................................... 500
Supplies expense .................................................... 500
5. Prepaid rent ................................................................ 1,000
Rent expense .......................................................... 1,000
Problem 212
Requirement 1

Computations:

Sales revenue:
Cash collected from customers $675,000
Add: Increase in accounts receivable 30,000
Sales revenue $705,000

Interest revenue:
Cash received $4,000
Add: Amount accrued at the end of
2016 ($50,000 x .08 x 9/12) 3,000 (c)
Deduct: Amount accrued at the end of 2015 (3,000)
Interest revenue $4,000

Cost of goods sold:

Cash paid for merchandise $390,000
Add: Increase in accounts payable 12,000
Purchases during2016 402,000
Add: Decrease in inventory 18,000
Cost of goods sold $420,000

Insurance expense:
Cash paid $6,000
Add: Prepaid insurance expired during 2016 2,500
Deduct: Prepaid insurance on 12/31/16
($6,000 x 4/12) (2,000) (a)
Insurance expense $6,500

Salaries and wages expense:

Cash paid $210,000
Add: Increase in salaries and wages payable 4,000
Salaries expense $214,000
Problem 212 (continued)

Interest expense:
Amount accrued at the end of 2016
($100,000 x .06 x 2/12) $1,000 (d)

Rent expense:
Amount paid $24,000
Add: Prepaid rent on 12/31/15 expired
during 2016 11,000
Deduct: Prepaid rent on 12/31/16 ($24,000 x 6/12) (12,000) (b)
Rent expense $23,000

Depreciation expense: Increase in accumulated depreciation $10,000

Zambrano Wholesale Corporation

Income statement
For the Year Ended December 31, 2016

Sales revenue $705,000

Cost of goods sold 420,000
Gross profit 285,000
Operating expenses:
Insurance $ 6,500
Salaries and wages 214,000
Rent 23,000
Depreciation 10,000
Total operating expenses 253,500
Operating income 31,500
Other income (expense):
Interest revenue 4,000
Interest expense (1,000) 3,000
Net income $34,500
Problem 212 (concluded)
Requirement 2

a. Prepaid insurance $ 2,000

b. Prepaid rent 12,000
c. Interest receivable 3,000
d. Interest payable 1,000
Problem 35
EXCELL COMPANY
Balance Sheet
At June 30, 2016
Assets
Current assets:
Cash and cash equivalents (1) ....................................................... $101,000
Short-term investments .................................................................... 47,000
Accounts receivable, net of allowance for uncollectible
accounts of $15,000 ........................................................................ 210,000
Interest receivable .............................................................................. 5,000
Prepaid expenses ................................................................................. 32,000
Total current assets .................................................................... 395,000
Investments:
Note receivable ..................................................................................... $ 65,000
Land held for sale ................................................................................ 25,000 90,000
Property, plant, and equipment:
Land .......................................................................................................... 50,000
Buildings ................................................................................................. 320,000
Equipment .............................................................................................. 265,000
635,000
Less: Accumulated depreciation ................................................... (280,000)
Net property, plant, and equipment .................................... 355,000
Total assets ................................................................................. $840,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................................................................. $173,000
Accrued expenses ................................................................................ 45,000
Note payable .......................................................................................... 50,000
Current maturities of long-term debt ......................................... 10,000
Total current liabilities .............................................................. 278,000
Long-term liabilities:
Note payable .......................................................................................... $ 50,000
Mortgage payable ................................................................................ 240,000
Total long-term liabilities ........................................................ 290,000
Shareholders equity:
Common stock, no par value; 500,000 shares
authorized; 200,000 shares issued and outstanding ........ 100,000
Retained earnings ............................................................................... 172,000
Total shareholders equity ....................................................... 272,000
Total liabilities and shareholders equity ...................... $840,000

(1) Includes $18,000 in U.S. treasury bills.

 Problem 37
HUBBARD CORPORATION
Balance Sheet
At December 31, 2016

Assets
Current assets:
Cash ........................................................................................................... $ 60,000
Marketable securities ........................................................................ 20,000
Accounts receivable (net) ................................................................ 120,000
Inventories ............................................................................................. 160,000
Total current assets .................................................................... 360,000

Investments:
Marketable securities ......................................................................... $ 40,000
Land held for sale ................................................................................ 50,000
Total investments ........................................................................ 90,000

Property, plant, and equipment:

Land (1) ................................................................................................... 130,000
Buildings ................................................................................................. 750,000
Machinery ............................................................................................... 280,000
1,160,000
Less: Accumulated depreciation ................................................... (255,000)
Net property, plant, and equipment .................................... 905,000

Intangible assets:
Patent ....................................................................................................... 100,000
Total assets ................................................................................. $1,455,000

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable ................................................................................. $ 215,000
Current maturities of long-term debt ......................................... 25,000
Total current liabilities .............................................................. 240,000

Long-term liabilities:
Notes payable ........................................................................................ 475,000

Shareholders equity:
Common stock, no par value; 100,000 shares
authorized; 100,000 shares issued and outstanding ........ $ 430,000
Retained earnings (2) ........................................................................ 310,000
Total shareholders equity ....................................................... 740,000
Total liabilities and shareholders equity ...................... $1,455,000

(1) $250,000 $50,000 in land held for sale $70,000 increase in land.
(2) $380,000 $70,000 increase in land.
Problem 39
HHD, INC.
Balance Sheet
At December 31, 2016
Assets
Current assets:
Cash ........................................................................................................... $ 150,000
Investment in stocks .......................................................................... 90,000
Accounts receivable ............................................................................ 200,000
Inventories ............................................................................................. 225,000
Prepaid insurance ............................................................................... 25,000
Total current assets .................................................................... 690,000
Investments:
Investment in stocks .......................................................................... $ 160,000
Restricted cash ..................................................................................... 250,000
Total investments ........................................................................ 410,000
Property, plant, and equipment:
Land .......................................................................................................... 800,000
Buildings ................................................................................................. 1,500,000
Equipment .............................................................................................. 500,000
2,800,000
Less: Accumulated depreciation ................................................... (800,000)
Net property, plant, and equipment .................................... 2,000,000
Intangible assets:
Patent ....................................................................................................... 110,000
Copyright ................................................................................................ 90,000
Total intangible assets ............................................................... 200,000
Total assets ................................................................................. $3,300,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .............................................................................. $ 100,000
Notes payable ..................................................................................... 150,000
Taxes payable ..................................................................................... 60,000
Total current liabilities ........................................................... 310,000
Long-term liabilities:
Notes payable ..................................................................................... $ 90,000
Bonds payable .................................................................................... 1,100,000
Total long-term liabilities ..................................................... 1,190,000
Shareholders equity:
Common stock, no par, 500,000 shares authorized,
200,000 shares issued and outstanding ............................... 1,000,000
Retained earnings ............................................................................ 800,000
Total shareholders equity .................................................... 1,800,000
Total liabilities and shareholders equity ................... $3,300,000
Problem 310

MELODY LANE MUSIC COMPANY

Balance Sheet
At December 31, 2016

Assets
Current assets:
Cash (1) .......................................................................... $167,000
Inventories ................................................................... 100,000
Prepaid rent ................................................................. 3,000
Total current assets ............................................ 270,000

Property, plant, and equipment:

Equipment and furniture ....................................... $ 40,000
Less: Accumulated depreciation ......................... (4,000)
Net property, plant, and equipment ............ 36,000
Total assets ......................................................... $306,000

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable (2) ............................................... $ 21,000
Interest payable .......................................................... 9,000
Loan payable ................................................................ 100,000
Total current liabilities ..................................... 130,000

Shareholders equity:
Common stock, no par, 100,000 shares
authorized, 20,000 shares issued and $100,000
outstanding ..................................................................
Retained earnings (3) .............................................. 76,000
Total shareholders equity ............................... 176,000
Total liabilities and shareholders equity $306,000
...................................................................................

(1) Cash receipts of $560,000 less cash disbursements of $393,000.

(2) $20,000 owed to suppliers + $1,000 owed to utility company.
(3) Net income for the year.
Problem 41
REED COMPANY
Comparative Income Statements
For the Years Ended December 31
2016 2015
Sales revenue $4,000,000 [6] $3,000,000
............................................................................................... [1
]
Cost of goods sold 2,570,000 [7] 1,680,000
............................................................................................... [2
]
Gross profit ...................................................................... 1,430,000 1,320,000
Operating expenses:
Administrative 750,000 [8] 635,000
............................................................................................. [3
]
Selling ............................................................................. [4] 340,000 [9] 282,000
Loss from fire damage ............................................... 50,000 --
Loss from write-down of obsolete inventory ... 35,000 --
Total operating expenses .................................... 1,175,000 917,000
Operating income ......................................................... 255,000 403,000
Other income (expense):
Interest revenue .......................................................... 150,000 140,000
Interest expense .......................................................... (200,000) (200,000)
Total other expenses (net) .................................. (50,000) (60,000)
Income from continuing operations before
income taxes .............................................................. 205,000 343,000
Income tax expense ...................................................... 82,000 137,200
Income from continuing operations ....................... 123,000 205,800
Discontinued operations:
Income (loss) from operations of discontinued
component (including loss on disposal of
$50,000 in 2016) ...................................................... (10,000) 110,000
Income tax benefit (expense) .................................... 4,000 (44,000)
Income (loss) on discontinued operations ......... [5] (6,000) 66,000
Net income ....................................................................... 117,000 271,800

Earnings per share:

Income from continuing operations ............................... $ 0 .41 $ 0.69
Discontinued operations ..................................................... (0.02) 0 .22
Net income ................................................................................ $ 0.39 $ 0 .91
Problem 41 (concluded)
[1] $4,400,000 400,000

[2] $2,860,000 290,000

[3] $800,000 50,000

[4] $360,000 20,000

[5] Loss in 2016:

Income from operations $ 40,000
Loss on sale of assets (50,000)
Loss before tax benefit (10,000)
Tax benefit (40% x $10,000) 4,000
Loss on discontinued operations, net of tax benefit $ (6,000)

[6] $3,500,000 500,000 (sales from discontinued operation)

[7] $2,000,000 320,000 (cost of goods sold from discontinued

operation)

[8] $675,000 40,000 (administrative expenses from discontinued

operations)

[9] $312,000 30,000 (selling expenses from discontinued operations)

Problem 42
Requirement 1

JACKSON HOLDING COMPANY

Comparative Income Statements (in part)
For the Years Ended December 31
2016 2015
Income from continuing operations before
income taxes [1] ................................................. $3,000,000 $1,300,000
Income tax expense ............................................... 1,200,000 520,000
Income from continuing operations ............... 1,800,000 780,000
Discontinued operations:
Income (loss) from operations of
discontinued
component (including gain on disposal of 200,000 (300,000)
$600,000 in 2016) [2] .............................................
Income tax benefit (expense) ........................... (80,000) 120,000
Income (loss) on discontinued operations .. 120,000 (180,000)
Net Income ................................................................ $1,920,000 $ 600,000

[1] Income from continuing operations before income taxes:

2016 2015
Unadjusted $2,600,000 $1,000,000
Add: Loss from discontinued operations 400,000 300,000
Adjusted $3,000,000 $1,300,000

[2] Income from discontinued operations:

2016 2015
Loss from operations $(400,000) $(300,000)
Gain on disposal 600,000 -
Total $ 200,000 $(300,000)
Problem 42 (concluded)
Requirement 2
The 2016 income from discontinued operations would include only the loss from
operations of $400,000. Since no impairment loss is indicated ($5,000,000 4,400,000 =
$600,000 anticipated gain), none is included. The anticipated gain on disposal is not recognized
until it is realized, presumably in the following year.
Requirement 3
The 2016 income from discontinued operations would include the loss from operations of
$400,000 as well as an impairment loss of $500,000 ($4,400,000 book value of assets less
$3,900,000 fair value).

Problem 43

MICRON CORPORATION
Partial Income Statement
For the Year Ended December 31, 2016

Income from continuing operations

before [1] $1,300,000
income taxes ....................................................
Income tax expense ......................................... 390,000
Income from continuing operations .......... 910,000
Discontinued operations:
Loss from operations of discontinued
component (including loss on disposal of
$300,000) .......................................................... $(140,000)
Income tax benefit ......................................... 42,000
Loss on discontinued operations ............... [2]
(98,000)
Net income ........................................................... 812,000

[1] Income from continuing operations before taxes:

Unadjusted $1,200,000
Add: Gain from sale of factory 100,000
 Adjusted $1,300,000

[2] Loss on discontinued operations:

Income from operations $ 160,000
Deduct: Loss on sale of assets (300,000)
Loss before tax (140,000)
Tax benefit (30% x $140,000) 42,000
Loss on discontinued operations $ (98,000)

Problem 44
1. Restructuring is an example of an event that is material and unusual.
Restructuring costs should be included in income from continuing operations but
reported on a separate line. The item is reported gross, not net of tax as with
discontinued operations.

2. The income from the discontinued operation should be presented, net of tax, in the income
statement below income from continuing operations. Also, earnings per share for income
from continuing operations, for the income from the discontinued operation, and for net
income should be disclosed.

3. The correction of the error should be treated as a prior period adjustment to

beginning retained earnings, not as an adjustment to current year's cost of goods
sold. In addition, the 2015 financial statements should be restated to reflect the
correction, and a disclosure note is required that communicates the impact of the
error on 2015 income.
Problem 48

DUKE COMPANY
Statement of Comprehensive Income
For the Year Ended December 31, 2016

Sales revenue ............................................................................. $15,000,000

Cost of goods sold ..................................................................... 9,000,000
Gross profit ................................................................................. 6,000,000

Operating expenses:
General and administrative ............................................... $1,000,000
Selling ....................................................................................... 500,000
Restructuring costs .............................................................. 300,000
Loss from write-down of obsolete inventory ............. 400,000
Total operating expenses ................................................ 2,200,000
Operating income ..................................................................... 3,800,000

Other income (expense):

Interest expense .................................................................... (700,000)
Income before income taxes.................................................. 3,100,000
Income tax expense ........................................................ 1,240,000
Net income ................................................................................. 1,860,000
Other comprehensive income (loss):
Foreign currency translation adjustment loss, net of tax (120,000)
Unrealized gains on investment securities, net of tax 108,000
...........................................................................................................
Total other comprehensive loss .......................................... (12,000)
Comprehensive income .......................................................... $ 1,848,000

Note:
The depreciation expense error is a prior period adjustment and is not reported in the income
statement.
Problem 410
Requirement 1

2015 Cash:
2015 Cash + Net increase in cash = 2016 Cash
2015 Cash + $86 = $145
2015 Cash = $59

2016 A/R:
2015 A/R + Cr. Sales Cash collections = 2016 A/R
$84 + 80 71 = $93

2015 Inventory:
2015 A/P + Purchases Cash paid = 2016 A/P
$30 + Purchases 30 = $40
Therefore, Purchases = $40
2015 Inventory + Purchases 2016 Inventory = Cost of goods sold
2015 Inventory + $40 60 = $32
2015 Inventory = $52

2015 Accumulated depreciation:

2016 accumulated depreciation less 2016 depreciation = 2015 accumulated
depreciation

$65 10 = $55
Problem 410 (continued)

2015 Total assets:

$59 + 84 + 52 + 50 + 150 55 = $340

2016 Total assets:

$145 + 93 + 60 + 150 65 = $383

2015 Income taxes payable:

2015 Inc. taxes payable + Inc. tax expense Income taxes paid =
2016 Inc. taxes payable
2015 Inc. taxes payable =2016 Inc. taxes payable + Taxes paid Inc. tax expense
2015 Inc. taxes payable = $22 + 9 7 = $24

2016 Retained earnings:

2015 R/E + Net income Dividends = 2016 R/E
$47 + 28 3 = $72

2015 Total liabilities and shareholders equity:

$30 + 9 + 24 + 230 + 47 = $340

2016 Total liabilities and shareholders equity:

$40 + 9 + 22 + 240 + 72 = $383
Problem 410 (concluded)

Requirement 2

GRANDVIEW CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2016
($ in millions)
Cash flows from operating activities:
Net income $ 28
Adjustments for noncash effects:
Depreciation expense 10
Gain on sale of investments (15)
Changes in operating assets and liabilities:
Increase in accounts receivable1 (9)
Increase in inventory2 (8)
Increase in accounts payable3 10
Decrease in income taxes payable4 (2)
Net cash flows from operating activities $14

1 $93 84
2 $60 52
3 $40 30
4 $22 24
Problem 5-1
Requirement 1
a. Number of performance obligations in the contract: 2.
The unlimited access to facilities and classes for one year is one performance
obligation. Because the discount voucher provides a material right to the
customer that the customer would not receive otherwise (a 25% discount rather
than a 10% discount), it is a second performance obligation. The discount
voucher is capable of being distinct because it could be sold or provided
separately, and it is separately identifiable, as it is not highly interrelated with
the other performance obligation of providing access to Fit & Slims facilities,
and the sellers role is not to integrate and customize them to create one product
or service. So, the discount coupon qualifies as a performance obligation.

b. To allocate the contract price to the performance obligations, we should first

consider that Fit & Slim would offer a 10% discount on the yoga course to all
customers as part of its normal promotion strategy. So, a 25% discount provides
a customer with an incremental value of 15% (25% 10%). Thus, the estimated
stand-alone selling price of the course voucher provided by Fit & Slim is $30
($500 initial price of the course 15% incremental discount 40% likelihood of
exercising the option).
F&Ss estimated stand-alone selling price of the discount option is:
Value of the yoga discount voucher:
(25% discount 10% normal discount) $500 = $ 75
Estimated redemption 40%
Stand-alone selling price of yoga discount voucher: $ 30
Stand-alone selling price of gym membership: 720
Total of stand-alone prices $750
Problem 5-1 (continued)
F&S must identify each performance obligations share of the sum of the stand-alone selling
prices of all deliverables:

Yoga discount $30

$30 + 720 = 4%
voucher:
$720
Gym membership: = 96%
$30 + 720
100%
F&S then allocates the total selling price based on stand-alone selling prices, as follows:

$700
Transaction Price

96% 4%

$672 $28
Gym membership Yoga discount voucher

The journal entry to record the sale is:

Cash 700
Deferred revenuemembership fees 672
Deferred revenueyoga coupon 28
Problem 5-1 (concluded)

Requirement 2
a. Number of performance obligations in the contract: 1.

The access to the gym for 50 visits is one performance obligation. The option to
pay $15 for additional visits does not constitute a material right because it
requires the same fee as would normally be paid by nonmembers. Therefore, it is
not a performance obligation in the contract.

(Note: It could be argued that the coupon book actually includes 50 performance
obligations one for each visit to the gym. That would end up producing a very
similar accounting outcome, as the $500 cost of the book would be allocated to
the 50 visits with revenue recognized for each visit.)

b. Since the option to visit on additional days is not a performance obligation, F&S
should not allocate any of the contract price to the option. Therefore, the entire
$500 payment is allocated to the 50 visits associated with the coupon book.

c. Cash 500
Deferred revenuecoupon book 500
Problem 52
Requirement 1
Number of performance obligations in the contract: 2.
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50% discount is a second performance obligation
because it provides a material right to the customer that the customer would not receive
otherwise. The option is capable of being distinct because it could be sold or provided separately,
and it is separately identifiable, as it is not highly interrelated with the other performance
obligation of delivering a Protab computer, and the sellers role is not to integrate and customize
them to create one product. So, the discount coupon qualifies as a performance obligation.
The 6-month quality assurance warranty is not a performance obligation. It is not sold
separately and is simply a cost to assure that the product is of good quality. The seller will
estimate and recognize an expense and related contingent warranty liability in the period of sale.
Accounting for warranties is covered in Chapter 13.
The coupon providing an option to purchase an extended warranty does not provide a material
right to the customer because the extended warranty costs the same whether or not it is purchased
along with the Protab. Therefore, that option does not constitute a performance obligation within
the contract to purchase a Protab package.
Problem 5-2 (continued)

Requirement 2
Allocation of purchase price to performance obligations:

Allocation of total
Percentage of the sum of the transaction price
Stand-alone selling stand-alone selling prices of to each
price of the the performance performance
performance obligations: obligation:
Performance
obligation:
obligation:
Protab tablet $76,000,0001 95%3 $74,100,0005
Option to
purchase a 4,000,0002 5%4 3,900,0006
Probook
Total $80,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit 100,000 units.
2
$4,000,000 = 50% discount $400 normal Probook price 100,000 discount coupons issued
20% probability of redemption.
3
95% = $76,000,000 $80,000,000
4
5% = $4,000,000 $80,000,000
5
$74,100,000 = 95.00% ($780 100,000 units)
6
$3,900,000 = 5.00% ($780 100,000 units)
Problem 5-2 (concluded)

Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices, as follows:

$78,000,000
Transaction Price

95% 5%

$74,100,000 $3,900,000
Protab computers Probook discount vouchers

The journal entry to record the sale is:

Cash ($780 100,000 units) 78,000,000
Sales revenue 74,100,000
Deferred revenuediscount option 3,900,000
Problem 53
Requirement 1
Number of performance obligations in the contract: 3.
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50% discount is a second performance obligation
because it provides a material right to the customer that the customer would not receive
otherwise. The option is capable of being distinct because it could be sold or provided separately,
and it is separately identifiable, as it is not highly interrelated with the other performance
obligations in the contract, so the discount coupon qualifies as a performance obligation.
The 6-month quality assurance warranty is not a performance obligation. It is not sold
separately and is simply a cost to assure that the product is of good quality. The seller will
estimate and recognize an expense and related contingent warranty liability in the period of sale.
Accounting for warranties is covered in Chapter 13.
The option to purchase the extended warranty provides a material right to the customer, as the
extended warranty costs less when purchased with the coupon that was included in the Protab
Package ($50) than it does when purchased separately ($75), so it is a third performance
obligation. The option is capable of being distinct because it could be sold or provided separately,
and it is separately identifiable, as it is not highly interrelated with the other performance
obligations in the contract, and the sellers role is not to integrate and customize them to create
one product or service. So, the discount coupon qualifies as a performance obligation.
Problem 5-3 (continued)
Requirement 2
Allocation of purchase price to performance obligations:

Percentage of the sum Allocation of total

of the stand-alone transaction price to
Stand-alone selling selling prices of the each performance
price of the performance obligation:
performance obligations (to two
Performance
obligation: decimal places):
obligation:
Protab tablet $76,000,0001 93.83%4 $73,187,4007

Option to purchase
Probook 4,000,0002 4.94%5 3,853,2008

Option to purchase
extended warranty 1,000,0003 1.23%6 959,4009
Total $81,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit 100,000 units.
2
$4,000,000 = 50% discount $400 normal Probook price 100,000 discount coupons issued
20% probability of redemption.
3
$1,000,000 = ($75 price of warranty sold separately minus $50 price of warranty sold at time
of software purchase) 100,000 units sold 40% probability of exercise of option.
4
93.83% = $76,000,000 $81,000,000
5
4.94% = $4,000,000 $81,000,000
6
1.23% = $1,000,000 $81,000,000
7
$73,187,400 = 93.83% ($780 100,000 units)
8
$3,853,200 = 4.94% ($780 100,000 units)
9
$959,400 = 1.23% ($780 100,000 units)
Problem 5-3 (concluded)
Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices, as follows:

$78,000,000
Transaction Price

93.83% 4.94% 1.23%

$73,187,400 $3,853,200 $959,400

Protab computers Probook discount vouchers Extended warranty

The journal entry to record the sale is:

Cash ($800 100,000 units) 78,000,000
Sales revenue 73,187,400
Deferred revenuediscount option 3,853,200
Deferred revenueextended 959,400
warranty
Problem 55
Requirement 1
The contract requires 6 payments of $20,000, plus or minus $10,000 at the end of the contract.
So the contract will provide either [(6 $20,000) + $10,000] = $130,000, or [(6 $20,000)
$10,000] = $110,000.
Revis would estimate the expected value of the transaction price as follows:

Possible Expected
Prices Probability Consideration

$130,000 ([$20,000 6] + $10,000) 80% $104,000

$110,000 ([$20,000 6] $10,000) 20% 22,000

Expected value of contract price at inception $126,000

Each month Revis will recognize $21,000 ($126,000 6) of revenue, recording the following
journal entry:

Cash 20,000
Bonus receivable 1,000
Service revenue 21,000

Requirement 2
After six months the bonus receivable will have accumulated to $6,000 (6 $1,000). If Revis
receives the bonus, it will record the following entry:

Cash 10,000
Bonus receivable 6,000
Service revenue 4,000
Problem 5-5 (concluded)
Requirement 3
If Revis pays the penalty, it will record the following entry:

Service revenue 16,000

Bonus receivable 6,000
Cash 10,000
Problem 56
Requirement 1

Cash 80,000
Deferred revenue 80,000
Because Super Rise believes that unexpected delays are likely and that it will not earn the
$40,000 bonus, Super Rise is not likely to receive the bonus. Thus, the $40,000 is not included in
the transaction price, and only the fixed payment of $80,000 is recognized as deferred revenue.
Requirement 2

Deferred revenue ($80,000 10) 8,000

Bonus receivable ($40,000 10) 4,000
Service revenue 12,000
Super Rise earns revenue of $12,000 associated in the month of January. Because Super Rise
believes it is likely to receive the bonus, it will estimate the transaction price to be $120,000
($80,000 fixed payment + $40,000 bonus), and will recognize 1/10 of that amount each month.
Requirement 3

Deferred revenue ($80,000 10) 8,000

Bonus receivable [($40,000 10) 5] 20,000
Service revenue 28,000
Super Rise earns revenue of $8,000 in each month, including May, based on the original
transaction of $80,000 ($80,000 10 months). However, no bonus receivable had been
recognized prior to May because unexpected delays were considered likely and thus no bonus was
expected. In May, Super Rise concludes it is likely to receive the bonus, so it will revise the
transaction price to $120,000 ($80,000 fixed payment + $40,000 contingent bonus). This means
Super Rise must record additional revenue of $20,000 to adjust revenue to the appropriate amount
[($40,000 bonus receivable 10 months) 5 months], and recognize a receivable for that
amount.
Problem 57
Requirement 1

Cash 80,000
Deferred revenue 80,000

Because Super Rise has high uncertainty about its bonus estimate, it cant argue that it is
probable that it wont have to reverse (adjust downward) a significant amount of revenue in the
future because of a change in its estimate. Therefore, the $40,000 is not included in the
transaction price, and only the fixed payment of $80,000 is recognized as deferred revenue.

Requirement 2

Deferred revenue ($80,000 10) 8,000

Bonus receivable [($40,000 10) 5] 20,000
Service revenue 28,000

Super Rise earns revenue of $8,000 in the month of May based on the original transaction of
$80,000 ($80,000 10 months). In addition, now that Super Rise can make an accurate estimate,
it can argue that it is probable that it wont have to reverse (adjust downward) a significant
amount of revenue in the future because of a change in its estimate. Therefore, Super Rise will
revise the transaction price to $120,000 ($80,000 fixed payment + $40,000 contingent bonus).
This means Super Rise must record additional revenue of $20,000 to adjust revenue to the
appropriate amount [($40,000 bonus receivable 10 months) 5 months], and recognize a
receivable for that amount.
Problem 5-8
Requirement 1
At the contracts inception, Velocity calculates the transaction price to be the expected value
of the two possible eventual prices:

Possible Expected
Prices Probabilities Consideration

$500,000 ([$60,000 8] + $20,000) 80% $400,000

$460,000 ([$60,000 8] $20,000) 20% 92,000
Expected value at contract inception: $492,000

Because its consulting services are provided evenly over the eight months, Velocity will
recognize revenue of $61,500 ($492,000 8 months = $61,500). Because Velocity is guaranteed
to receive only $60,000 per month ($1,500 less than the revenue recognized), it will recognize a
bonus receivable of $1,500 in each month to reflect the expected value of the bonus amount to be
received at the end of the contract. Therefore, Velocitys journal entry to record the revenue each
month for the first four months is as follows:

Accounts receivable 60,000

Bonus receivable 1,500
Service revenue 61,500
Problem 58 (continued)
Requirement 2
By the end of the fourth month, the bonus receivable account would have a balance of $6,000
(4 $1,500), equal to half of the expected value of the bonus of $12,000 ($492,000 [8
$60,000]). After four months, the estimated likelihood of receiving the bonus is revised so the
estimated transaction price decreases:

Possible Expected
Prices Probabilitie Consideration
s
$500,000 ([$60,000 8] + $20,000) 60%
$460,000 ([$60,000 8] $20,000) 40% 184,000
$300,000
Transaction price after four months: $484,000

So, after four months, the bonus receivable account should have a balance of $2,000, which is
half of the new expected value of the bonus of $4,000 ($484,000 [8 $60,000]). Because the
bonus receivable account was increased to $6,000 in the first four months, an adjustment of
$4,000 is needed to reduce the bonus receivable down to $2,000:

Service revenue 4,000

Bonus receivable 4,000

This entry reduces the bonus receivable from $6,000 to $2,000, with the offsetting debit being
a reduction in revenue. Over the remaining four months, the bonus receivable will increase by
$500 each month, accumulating to $4,000 by the end of the contract.
Problem 58 (concluded)
Requirement 3
Because services are provided evenly over the eight months, Velocity would recognize
revenue of $60,500 ($484,000 8 months) in each of months five through eight. Because
Velocity received $60,000 per month ($500 less than the revenue recognized), Velocity would
recognize a bonus receivable of $500 each month to reflect the additional service revenue in
excess of its unconditional right to $60,000. The journal entry would be:

Accounts receivable 60,000

Bonus receivable 500
Service revenue 60,500

Requirement 4
At the end of contract, Velocity learns that it will receive the bonus of $20,000. It already has
recognized revenue of $4,000 associated with the bonus. Therefore, when Velocity receives the
cash bonus, it will recognize additional revenue of $16,000.

Cash 20,000
Bonus receivable 4,000
Service revenue 16,000
Problem 512
Requirement 1
2016 2017 2018
Contract price $4,000,000 $4,000,000 $4,000,000
Actual costs to date 350,000 2,500,000 4,250,000
Estimated costs to complete 3,150,000 1,700,000 -0-
Total estimated costs 3,500,000 4,200,000 4,250,000
Estimated gross profit (loss)
(actual in 2018) $ 500,000 $ (200,000) $ (250,000)

Year Gross profit (loss) recognized

2016 -0-
2017 $(200,000)
2018 (50,000)
Total project loss $(250,000)

Requirement 2
Gross profit (loss) recognition:

2016: Revenue: (10% $4,000,000) 350,000 cost = $50,000

2017: $(200,000) 50,000 = $(250,000)
2018: $(250,000) (200,000) = $(50,000)

Requirement 3

Balance Sheet 2016 2017

Current assets:
Costs less loss ($2,300,000*) in
excess of billings ($2,170,000) $ 130,000
Current liabilities:
Billings ($720,000) in excess
of costs and profit ($400,000) $ 320,000
*Cumulative costs ($2,500,000) less cumulative loss recognized ($200,000) =
$2,300,000
Problem 513
Requirement 1
Recognizing revenue upon completion of long-term construction contracts is equivalent to
recognizing revenue at the point in time at which deliver occurs. Recognizing revenue over time
requires assigning a share of the projects expected revenues and costs to each construction
period. The share is estimated based on the project's costs incurred each period as a percentage of
the project's total estimated costs.

Requirement 2
2016 2017
Contract price $20,000,000 $20,000,000
Actual costs to date 4,000,000 13,500,000
Estimated costs to complete 12,000,000 4,500,000
Total estimated costs 16,000,000 18,000,000
Estimated gross profit $ 4,000,000 $ 2,000,000

a. Revenue recognition: If revenue is recognized upon project completion,

Citation would not report any revenue in the 2016 or 2017 income
statements.

b. Gross profit recognition:

If revenue is recognized upon project completion, Citation would not
report gross profit until the project is completed. Citation would have to
report an overall gross loss on the contract in whatever period it first
revises the estimates to determine that an overall loss will eventually
occur. Citation never estimates the Altamont contract will earn a gross
loss, so never has to recognize one.
Problem 513 (continued)
c.

Balance Sheet
At December 31, 2016
Current assets:
Accounts receivable $ 200,000
Costs ($4,000,000*) in excess
of billings ($2,000,000) 2,000,000

* If revenue is recognized upon project completion, this account would

only include costs of $4,000,000

Requirement 3
2016 2017
Contract price $20,000,000 $20,000,000
Actual costs to date 4,000,000 13,500,000
Estimated costs to complete 12,000,000 4,500,000
Total estimated costs 16,000,000 18,000,000
Estimated gross profit $ 4,000,000 $ 2,000,000
a. Revenue recognition:

2016:
$ 4,000,000
Revenue: = 25% $20,000,000 = $5,000,000
$16,000,000

2017:
$13,500,000
Revenue: = 75% $20,000,000 = $15,000,000
$18,000,000
Less: 2016 revenue 5,000,000
2017 revenue $10,000,000
b. Gross profit recognition:

2016: Gross Profit: $5,000,000 4,000,000 = $1,000,000

2017: Gross Profit: $10,000,000 9,500,000 = $500,000

Problem 513 (continued)
c.

Balance Sheet
At December 31, 2016
Current assets:
Accounts receivable $ 200,000
Costs and profit ($5,000,000*) in
excess 3,000,000
of billings ($2,000,000)

* Costs ($4,000,000) + profit ($1,000,000)

Requirement 4
2016 2017
Contract price $20,000,000 $20,000,000
Actual costs to date 4,000,000 13,500,000
Estimated costs to complete 12,000,000 9,000,000
Total estimated costs 16,000,000 22,500,000
Estimated gross profit $ 4,000,000 ($ 2,500,000)

a. Revenue recognition:

Total revenue recognized to date = (percentage complete)(total

revenue)
= ($13,500,000 22,500,000) x ($20,000,000)
= (60%) x ($20,000,000)
= $12,000,000
Revenue recognized in 2017 = total revenue recognized in prior
periods
= $12,000,000 5,000,000 = $7,000,000

b. Gross profit recognition:

2017: Overall loss of ($2,500,000) previously recognized gross profit of

$1,000,000 = $3,500,000.
Problem 513 (continued)
c.

Balance Sheet
At December 31, 2017
Current assets:
Accounts receivable $ 1,600,000

Current liabilities:
Billings ($12,000,000) in excess of
costs and profit ($11,000,000*) 1,000,000

* 2016 costs ($4,000,000) + 2016 profit ($1,000,000) + 2017 costs

($9,500,000) 2017 loss ($3,500,000)

Requirement 5
Citation should recognize revenue at the time of delivery, when the homes are completed
and title is transferred to the buyer. Recognizing revenue over time is not appropriate in this case,
because the criteria for revenue recognition over time are not met. Specifically, the customers are
not consuming the benefit of the sellers work as it is performed (criterion 1 in Illustration 5-5),
the customer does not control the asset as it is created (criterion 2), and the homes have an
alternative use to the seller and seller does not have the right to receive payment for progress to
date (criterion 3). Until completion of the home, transfer of title does not occur and the full sales
price is not received, so control of the homes has not passed from Citation to the buyers.
Requirement 6
Income statement:
Sales revenue (3 x $600,000) $1,800,000
Cost of goods sold (3 x $450,000) 1,350,000
Gross profit $ 450,000

Balance sheet:
Current assets:
Inventory (work in process) $2,700,000
Current liabilities:
Customer deposits (or deferred revenue) $300,000*
*$600,000 x 10% = $60,000 x 5 = $300,000
Problem 61
Choose the option with the lowest present value of cash outflows, net of the present value of
any cash inflows (Cash outflows are shown as negative amounts; cash inflows as positive
amounts).

Machine A:

PV = $48,000 1,000 (6.71008* ) + 5,000 (.46319** )

* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)
** Present value of $1: n = 10, i = 8% (from Table 2)

PV = $48,000 6,710 + $2,316

PV = $52,394

Machine B:

PV = $40,000 4,000 (.79383) 5,000 (.63017) 6,000 (.54027)

PV of $1: i = 8% n=3 n=6 n=8
(from Table 2)

PV = $40,000 3,175 3,151 3,242

PV = $49,568

Esquire should purchase machine B.

Problem 62

1. PV = $10,000 + 8,000 (3.79079* ) = $40,326 = Equipment

* Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)

2. $400,000 = Annuity amount x 5.9753*

* Future value of an annuity due of $1: n = 5, i = 6% (from Table 5)

Annuity amount = $400,000

5.9753

Annuity amount = $66,942 = Required annual deposit

3. PVAD = $120,000 (9.36492* ) = $1,123,790 = Lease liability

* Present value of an annuity due of $1: n = 20, i = 10% (from Table 6)
Problem 63
Choose the option with the lowest present value of cash payments.

1. PV = $1,000,000

2. PV = $420,000 + 80,000 (6.71008* ) = $956,806

* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)

3. PV = PVAD = $135,000 (7.24689* ) = $978,330

* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

4. PV = $1,500,000 (.68058* ) = $1,020,870

* Present value of $1: n = 5, i = 8% (from Table 2)

Harding should choose option 2.

Problem 64
The restaurant should be purchased if the present value of the future cash
flows discounted at a 10% rate is greater than $800,000.

PV = $80,000 (4.35526* ) + 70,000 (.51316** ) + 60,000 (.46651**)

n=7 n=8

+ 50,000 (.42410**) + 40,000 (.38554**) + 700,000 (.38554**)

n=9 n = 10 n = 10

* Present value of an ordinary annuity of $1: n = 6, i = 10% (from Table 4)

** Present value of $1: i = 10% (from Table 2)

PV = $718,838 < $800,000

Since the PV is less than $800,000, the restaurant should not be

purchased.
Problem 65
The maximum amount that should be paid for the store is the present value of the estimated
cash flows.

Years 15:

PVA = $70,000 x 3.99271* = $279,490

* Present value of an ordinary annuity of $1: n = 5, i = 8% (from Table 4)

Years 610:

PVA = $70,000 x 3.79079* = $265,355

* Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)

PV = $265,355 x .68058* = $180,595

* Present value of $1: n = 5, i = 8% (from Table 2)

Years 1120:
PVA = $70,000 x 5.65022* = $395,515
* Present value of an ordinary annuity of $1: n = 10, i = 12% (from Table 4)

PV = $395,515 x .62092* = $245,583

* Present value of $1: n = 5, i = 10% (from Table 2)

PV = $245,583 x .68058* = $167,139

* Present value of $1: n = 5, i = 8% (from Table 2)

End of Year 20:

PV = $400,000 x .32197* x .62092 x .68058 = $54,424

* Present value of $1: n = 10, i = 12% (from Table 2)

Total PV = $279,490 + 180,595 + 167,139 + 54,424 = $681,648

The maximum purchase price is $681,648.

Problem 66
1.
PV of $1 factor = $30,000 = .5000*
$60,000
* Present value of $1: n = ?, i = 8% (from Table 2, n = approximately 9 years)

2.
PVA
Annuity factor = Annuity amount

Annuity factor = $28,700 = 4.1000*

$7,000
* Present value of an ordinary annuity of $1: n = 5, i = ? (from Table 4, i =
approximately 7%)

3.
PVA
Annuity amount = Annuity factor

Annuity amount = $10,000 = $1,558 = Payment

6.41766*
* Present value of an ordinary annuity of $1: n = 10, i = 9% (from Table 4)
Problem 68
Requirement 1
Present value of payments 46:

PVA = $40,000 x 2.48685* = $99,474

* Present value of an ordinary annuity of $1: n = 3, i = 10% (from Table 4)

PV = $99,474 x .75131* = $74,736

* Present value $1: n = 3, i = 10% (from Table 2)

Present value of all payments:

$ 62,171 (PV of payments 13: $25,000 x 2.48685* )

74,736 (PV of payments 46 calculated above)

$136,907

The note payable and corresponding building should be recorded at

$136,907.

Or alternatively:

PV = $25,000 (2.48685* ) + 40,000 (1.86841** ) = $136,907

* Present value of an ordinary annuity of $1: n = 3, i = 10% (from Table 4)

From Table 4,
PVA factor, n = 6, i = 10% = 4.35526
PVA factor, n = 3, i = 10% = 2.48685
= PV factor for deferred annuity = 1.86841**

Requirement 2

$136,907 x 10% = $13,691 = Interest in the year 2016

Problem 69
Choose the alternative with the highest present value.

Alternative 1:

PV = $180,000

Alternative 2:
PV = PVAD = $16,000 (11.33560* ) = $181,370
* Present value of an annuity due of $1: n = 20, i = 7% (from Table 6)

Alternative 3:
PVA = $50,000 x 7.02358* = $351,179
* Present value of an ordinary annuity of $1: n = 10, i = 7% (from Table 4)

PV = $351,179 x .54393* = $191,017

* Present value of $1: n = 9, i = 7% (from Table 2)

John should choose alternative 3.

Or, alternatively (for 3):

PV = $50,000 (3.82037* ) = $191,019

(difference due to rounding)

From Table 4,
PVA factor, n = 19, i = 7% = 10.33560
PVA factor, n = 9, i =7% = 6.51523
= PV factor for deferred annuity = 3.82037*

or, From Table 6,

PVAD factor, n = 20, i = 7% = 11.33560

PVAD factor, n = 10, i = 7% = 7.51523
= PV factor for deferred annuity = 3.82037*
Problem 610

PV = $20,000 (3.79079* ) + 100,000 (.62092** ) = $137,908

* Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)
** Present value of $1: n = 5, i = 10% (from Table 2)

The note payable and corresponding merchandise should be recorded at $137,908.

Problem 611
Requirement 1
PVAD = Annuity amount x Annuity factor

PVAD
Annuity amount = Annuity factor

Annuity amount = $800,000

7.24689*
* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

Annuity amount = $110,392 = Lease payment

Requirement 2
Annuity amount = $800,000
6.71008*
* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)

Annuity amount = $119,224 = Lease payment

Requirement 3
PVAD = (Annuity amount x Annuity factor) + PV of residual

PVAD PV of residual
Annuity amount = Annuity factor

PV of residual = $50,000 x .46319* = $23,160

* Present value of $1: n = 10, i = 8% (from Table 2)

Annuity amount = $800,000 23,160

7.24689*
* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

Annuity amount = $107,196 = Lease payment

Problem 613
Choose the option with the lowest present value of cash outflows, net of the present value of
any cash inflows. (Cash outflows are shown as negative amounts; cash inflows as positive
amounts)

1. Buy option:

PV = $160,000 5,000 (5.65022* ) + 10,000 (.32197** )

* Present value of an ordinary annuity of $1: n = 10, i = 12% (from Table 4)
** Present value of $1: n = 10, i = 12% (from Table 2)

PV = $160,000 28,251 + 3,220

PV = $185,031

2. Lease option:

PVAD = $25,000 (6.32825* ) = $158,206

* Present value of an annuity due of $1: n = 10, i = 12% (from Table 6)

Kiddy Toy should lease the machine.