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Revenue, Construction Contracts and Borrowing Costs

Start Date: Due Date: 7 Sep 2011 at 10:00 AM Unlimited Yes. Attempts after Due Date will be Marked Late

Student Access after Due Date: Graded: No

Additional Self Test, Question 9

Companies commonly recognize revenues from manufacturing and selling activities at point of sale (usually meaning delivery). False True

Self Test, Question 9

Which of the following is not a condition for revenue recognition for a bill and hold sale? It is probable that the goods will be delivered. The buyer acknowledges the deferred delivery arrangement. It is standard industry practice for the seller to hold goods for future delivery. The goods are identified, on hand and ready for delivery.

Additional Self Test, Question 21

In a principal-agent relationship, amounts collected by the agent on behalf of the principal are: revenues to the principal and the agent. the answer cannot be determined from the information provided. revenues to the agent. revenues to the principal.

Self Test, Question 10

When is revenue recognized by the consignor on a consignment sale?

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When the consignee agrees to take the goods on consignment. When the consignee sells the goods to a third party. When goods are delivered to consignee. When cash is received from the consignee.

Self Test, Question 3

When a seller is exposed to continued risks of ownership through return of the product, which of the following is not an acceptable revenue recognition method? Recognized revenue when all return privileges have expired. Recognize revenue immediately, but reduce revenue by an estimate of future returns. Recognize revenue at the time of sale and account for returns as they occur. All of the above are acceptable revenue recognition methods when the seller is exposed to continued risks of ownership through the return on the product.

Self Test, Question 6

In December 2010, Oikas Company offered a significant discount to customers to encourage them to overbuy inventory. This is an example of channel stuffing. a bill and hold sale. a sale with buyback. a consignment sale.

Self Test, Question 4

IFRs requires the percentage-of -completion method be used when specific conditions exist. These include all of the following except: estimates of progress towards completion can be reliably measured. All of the options must exist. total contract revenue can be reliably measured. it is probable that the economic benefits associated with the contract will flow to the company.

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Post-Lecture, Question 3
Under the percentage-of-completion method, how should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract? Net, as income from construction if credit balance, and loss from construction if debit balance. Progress billings as income, construction in process as inventory. Progress billings as deferred income, construction in progress as a deferred expense. Net, as a current asset if a debit balance, and as a current liability if a credit balance.

Multiple Choice, Question 83

Messersmith Company is constructing a building. Construction began in 2010 and the building was completed 12/31/10. Messersmith made payments to the construction company of $1,000,000 on 7/1, $2,100,000 on 9/1, and $2,000,000 on 12/31. Average accumulated expenditures were $3,100,000. $5,100,000. $1,025,000. $1,200,000.

E18-18
(Service Arrangement) Highland Health Club charges an initiation fee of $1,800 to join the club and $250 per month in dues. During its first year of operation, it enrolled 400 members starting on January 2, 2010. It is estimated, based on past experience at its other locations, that a member will use the club approximately 18 months before resigning. The entire initiation fee is non-refundable. Determine the amount of revenue Highland should report in 2010 related to these members. $

E18-13
(Recognition of Profit, Percentage-of-Completion)

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In 2010, Gurney Construction Company agreed to construct an apartment building at a price of $1,200,000. The information relating to the costs and billings for this contract is shown below. 2010 $280,000 520,000 150,000 120,000 2011 $600,000 200,000 500,000 320,000 2012 $785,000 -01,200,000 940,000

Cost incurred to date Estimated costs yet to be incurred Customer billings to date Collection of billings to date

Assuming that the percentage-of-completion method is used, 1. compute the amount of gross profit to be recognized in 2010 and 2011, and 2010 Gross profit recognized $ $ 2011

2. prepare journal entries for 2011. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 3, 2.) Description/Account Debit Credit

Materials, Cash, Payables, etc.

Cash

Construction Expenses

For 2011, show how the details related to this construction contract would be disclosed on the statement of financial position and on the income statement. (List items under Statement of Financial Position from smallest to largest amount, e.g. 2, 3, 5, 10.) Income Statement (2011) $ Statement of Financial Position (12/31/11)

$ $

E18-11
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(Analysis of Percentage-of-Completion Financial Statements) In 2010, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2010, follow. Statement of Financial Position Construction in progress Less: Contract billings Cost of uncompleted contract in excess of billings Accounts receivableconstruction contract billings Income Statement Income (before tax) on the contract recognized in 2010 $65,000 61,500 $3,500 18,000

$19,500

How much cash was collected in 2010 on this contract? $

What was the initial estimated total income before tax on this contract? $

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