ACCT 3331 Exam 2 Review Chapter 18 Revenue Recognition Know the revenue recognition principle and how to account

nt for revenue recognized at the point of sale / delivery. Know how to account for long-term construction contracts using use the percentage-ofcompletion method (including scenarios with current period losses and overall contract losses). Know how to account for installment sales using both the installment sales method and the cost recovery method. Chapter 7 Cash and Receivables Review the accounting for cash discounts using either the gross or net method. Understand the steps necessary to calculate (1) bad debt expense for a given year, (2) the ending balance in the allowance for bad debt account, and (3) net realizable value of accounts receivable using either the income statement (percentage of sales) method or the balance sheet (percentage of receivables) method. Know the journal entries required to write-off actual uncollectible accounts and to recover a previously written-off account. Be able to use the present value tables to calculate the present value of future cash flows associated with a Note Receivable. Understand how to account for zero-interest-bearing notes receivables, as well as notes whose stated interest rate is different from the market rate of interest. Be familiar with using an amortization table to determine interest revenue, discount amortization, carrying value, etc. Chapter 8 Inventory Know the COGS formula used with the periodic inventory system. Review the accounting for cash discounts using either the gross or net method, as well as the journal entries used to record purchases and sales of inventory. Know how to value ending inventory and COGS under the weighted-average method (perpetual and periodic systems), FIFO (perpetual and periodic systems), and LIFO (perpetual and periodic systems). Know the advantages and disadvantages of FIFO versus LIFO. Understand the conversion from FIFO to Dollar Value (DV) LIFO. Chapter 9 Lower of Cost or Market Be able to calculate floor and ceiling amounts under the lower of cost or market rule (LCM). Determine ending inventory values under LCM and accounting for write-downs of inventory when market is lower than cost (using both the direct and indirect methods).

Example Problems Chapters 18 and 7-9 1. Astra Construction Company contracted to build an office building for $4,000,000. Construction began in 2003 and was completed in 2004. Data relating to the contract are summarized below: 2003 Costs incurred during the year Estimated costs to complete as of 12/31 Billings during the year Cash collections during the year 1,400,000 2,200,000 1,900,000 1,500,000 2004 2,000,000 0 2,100,000 2,000,000

What amount of income (e.g., gross profit) on the long term contract would Astra report in 2003 and 2004 if the firm uses the percentage of completion method of accounting for long term contracts?

2003 Income on Long Term Contract

2004

2. In 2004, Mighty Mouse sold equipment to the Littleton Company for $65,000. The equipment cost Mighty Mouse $47,000. Mighty Mouse collected $20,000 in 2004, $30,000 in 2005 and $15,000 in 2006. REQUIRED: If Mighty Mouse uses the cost recovery method of accounting for installment sales, what amount of gross profit will be recognized in each year? 2004 Gross Profit on Installment Sales 2005 2006

3. Duncans Appliance Warehouse made sales of $300,000 in 2000 that qualified for the installment sales method of accounting. The items sold had originally cost Duncans $195,000. During 2000, Duncans collected cash from installment customers of $135,000. The remaining amount will be collected in 2001. REQUIRED: Prepare all of the necessary entries to correctly report the installment sale in the 2000 financial statements.

4. On June 3, Comet Corp. sold merchandise with a sales price of $5,000 under terms of 2/10, n/60. On June 12, Comet received a check for the balance due from the customer. A. Prepare the required journal entries on June 3 and June 12, assuming Comet records sales using the gross method.

B. If this were the only sale that took place during the year, what amount of net sales revenue would Comet Corp. record on its year-end financial statements? $ _______________________________

5. At the end of 2008, Comet Company has accounts receivable of $500,000 and an Allowance for Bad Debt of $25,000 (credit). On January 24, 2009, it learns that the companys receivable from Crusader Inc. is not collectible and therefore management authorizes a write-off of their account for $10,000.
a.

Prepare the journal entry to record the write-off of the uncollectible account.

b.

What is the Net Realizable Value of the Accounts Receivables:

1. 2.

Before the write-off _____________________________ After the write-off _____________________________

6. The following balances relate to Smith Company: Credit Sales ABD (1/1/06) Accounts Receivable (1/1/06) $1,000,000 $2,000 (credit) $48,000

Annual bad debts are estimated to be 3% of credit sales. An account with a balance of $400, previously written off, is collected during 2006. Furthermore, $800 of the accounts are written off in 2006 as uncollectible. The balance in the Allowance for Bad Debts account at December 31, 2006 (after adjustment) would be:

7. The ledger of the Patio Company at the end of the current year shows accounts receivable of $80,000 and credit sales of $900,000. If the Allowance for Bad Debt has a debit balance of $500 before adjustment, determine the ending balance in the Allowance account after adjustment assuming the company uses either of the following two methods to estimate bad debts (these are independent situations, so work each separately): 1. 0.75% of credit sales

2. 8% of Accounts Receivable

8. On December 31, 2010 ABC rendered services in exchange for an 8%, 5 year promissory note having a face value of $80,000. Interest was to be paid semi-annually. This customer had a credit rating which required that money be borrowed at 10% interest. REQUIRED: Answer the following questions. A. What amount of Service Revenue will ABC record on December 31, 2010 (the date the note is issued)? $_____________________________

B. Using the effective interest method, determine interest revenue for ABC for the year ended December 31, 2011. $ ________________________________

C. What is the unamortized portion of the discount as of December 31, 2011? $ __________________________________

D. Determine the carrying value of the note on ABCs balance sheet on December 31, 2012. $ _________________________________

9. ABC sold one of its best-selling products on January 1st and received in exchange a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6% (compounded annually). How does ABC record the receipt of this note on January 1st? What journal entry will ABC make on December 31st of the same year?

10. True or False? When using the periodic method, new purchases of inventory are credited to the temporary Purchases account.

11. Use the following data to answer parts A and B below: Jan. 1 Beginning inventory Jan. 15 Purchase Jan. 19 Sale Jan. 30 Purchase 2,200 units @ $4 6,000 units @ $4.40 4,000 units 2,000 @ 4.75

A. What is (a) ending inventory and (b) cost of goods sold assuming a periodic inventory system and a LIFO cost flow assumption?

B. What is (a) ending inventory and (b) cost of goods sold assuming a perpetual inventory system and a weighted-average cost flow assumption?

Suppose a company that handles medical supplies has these inventory records for March 2010: Date Mar. 1 Mar. 4 Mar. 13 Mar. 19 Mar. 24 Item Beg. Inv. Purchase Purchase Purchase Purchase Quantity 200 376 330 225 300 Per Unit $27.00 $26.50 $26.00 $25.40 $25.00 Total $5,400 $9,964 $8,580 $5,715 $7,500

It also made the following sales during the month: Date Mar. 7 Mar. 22 Mar. 28 Item Sale Sale Sale Quantity 400 570 130 Per Unit $63.00 $63.75 $64.50 Total $25,200 $36,337.50 $8,385

Company records reveal that operating expenses for March were $20,500. Fill in the appropriate value for each of the questions below (1 pt each). 12. Ending Inventory using FIFO and a perpetual inventory system is (round to nearest dollar): $

13.

Gross profit using the weighted average method and a periodic inventory system is (round unit cost to two decimal places): $ ,

14.

Net income using FIFO and a periodic inventory system is (round to the nearest dollar): $

15. Suppose Comet Company adopts dollar-value LIFO on December 31, 2008. Inventory at current prices on that date was $20,000. Inventory at current prices on Dec. 31, 2009 is $26,400. If prices have increased 20% during 2009, what is ending inventory on Dec. 31, 2009 using dollar-value LIFO?

16. The following information relates to the Choctaw Company. Date December 31, 2007 December 31, 2008 December 31, 2009 Ending Inventory (end-of-year prices) 70,000 88,200 95,120 Price Index 1.00 1.05 1.16

REQUIRED: Use the dollar-value LIFO method to compute the ending inventory for 2007 through 2009.

17. Unit costs of the principle product sold by a company are shown in the top line of the table below for 5 different products. Beneath the actual cost figures are the anticipated selling prices and replacement costs of the product. Distribution costs average $12 per unit and normal profit has averaged 10 percent of sales prices. Applying lower-of-cost-or-market, determine unit inventory values for each case. 1 $140 160 150 2 156 180 154 3 152 180 146 4 160 190 162 5 160 190 158

Actual Cost Sales Price Replacement Cost Ceiling Value Floor Value Inventory Value

SOLUTIONS: 1. 2003 gross profit = $155,600 2004 gross profit = $444,400 2. 2004 gross profit = 0 2005 gross profit = $3,000 2006 gross profit = $15,000

3. Installment A/R 300,000 Installment Revenue 300,000 Cost of Installment Sales Inventory Cash 135,000 Installment A/R 195,000 195,000

135,000

Installment Revenue 300,000 Cost of Installment Sales 195,000 Deferred Gross Profit 105,000 (plug) GP% = (35%)(135,000) = 47,250 realized gross profit Deferred G.P. 47,250 Realized G.P. 47,250

4. A. June 3: A/R

5000 Revenue

5000

June 12: Cash 4900 Sales Discounts 100 A/R 4. B. 4900

5000

5. A. ABD A/R

10,000 10,000

Before write-off:

A/R 500,000 -ABD (25,000) NRV 475,000 A/R 490,000 -ABD (15,000) NRV 475,000

After write-off:

5. B (#1) = 475,000 5. B (#2) = 475,000

6. Ending ABD = 31,600 7. (#1) = 0.0075*900,000 = 6750 7. (#2) = 0.08*80,000 = 6400 Ending balance in ABD = 6250 Ending balance in ABD = 6400

8. A. $73,823 (present value of lump sum + present value of periodic payments of $3200) 8. B. Interest Revenue = $7,407 (3691+3716) 8. C. Unamortized discount on Dec. 2011 = $5,170 8. D. Carrying Value on December 2012 = $75,941

9. 100,000(0.74726) = $74,726 January 1st: N/R 100,000 Discount on N/R Cash December 31st: Carrying value = 74,726 * 0.06 = 4,484 (interest revenue for the 1st year) Discount on N/R Interest Revenue 4484 4484 25,274 74,726

10. FALSE 11. A. Ending Inventory = $26,400 (2200 x 4 + 4000 x 4.40) Cost of Goods Sold = $18,300 (2000 x 4.75 + 2000 x 4.40) 11. B. Ending Inventory = $17,171 Cost of Goods Sold = $27,529

12. $8287 13. $41,356 14. $20,551

15. Ending inventory in 2009 at base year prices is $26,400 / 1.20 = $22,000. 20,000*1.00 = 20,000 2,000*1.20 = 2400 First layer of $20,000 + Second layer of $2400 = Ending inventory on Dec. 31, 2009 of $22,400 16. 2007 ending inventory = $70,000 2008 ending inventory = $84,700 ($14,000 real increase * 1.05 = $14,700 + 70,000 from 2007) 2009 ending inventory = $82,600 ($2000 real decrease --- layer 2 = $12,000 * 1.05 = $12,600 + 70,000)

17. 1 $140 160 150 148 132 140 (cost) 2 156 180 154 168 150 154 (mkt) 3 152 180 146 168 150 150 4 160 190 162 178 159 160 5 160 190 158 178 159 159

Actual Cost Sales Price Replacement Cost Ceiling Value Floor Value Inventory Value

For #1 = ceiling = sales price disposal cost = 160-12 = 148 Floor = NRV normal profit margin = 148 (0.10*160) = 132 Market = ceiling = 148