18 Revenue Recognition EXERCISES 18.2
E18-21 (LO3) (Sales with Returns) Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.
Instructions
(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.
(b) Briefly discuss the reasoning for your answers in (a) above.
(c) On July 1, 2017, Uddin shipped books invoiced at $15,000,000 (cost $12,000,000). Prepare the journal entry to record this transaction.
(d) On October 3, 2017, $1.5 million of the invoiced July sales were returned according to the return policy, and the remaining $13.5 million was paid. Prepare the journal entries for the return and payment.
(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.
E18-22 (LO3) (Sales with Repurchase) Cramer Corp. sells idle machinery to Enyart Company on July 1, 2017, for $40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2018, for a price of $42,400 (an imputed interest rate of 6%).
Instructions
(a) Prepare the journal entry for Cramer for the transfer of the asset to Enyart on July 1, 2017.
(b) Prepare any other necessary journal entries for Cramer in 2017.
(c) Prepare the journal entry for Cramer when the machinery is repurchased on June 30, 2018.
E18-23 (LO3) (Repurchase Agreement) Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.
Instructions
(a) Prepare Zagat’s journal entry necessary on March 1, 2017.
(b) Prepare Zagat’s journal entry for the repurchase of the ingots on May 1, 2017.
E18-24 (LO3) (Bill and Hold) Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay $2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of $300,000.
Instructions
(a) Explain this type of revenue recognition transaction.
(b) What factors should be considered in determining when to recognize revenue in this transaction?
(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.
E18-25 (LO3) (Consignment Sales) On May 3, 2017, Eisler Company consigned 80 freezers, costing $500 each, to Remmers Company. The cost of shipping the freezers amounted to $840 and was paid by Eisler Company. On December 30, 2017, a report was received from the consignee, indicating that 40 freezers had been sold for $750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of $200, and total installation costs of $320 on the freezers sold.
Instructions
(a) Compute the inventory value of the units unsold in the hands of the consignee.
(b) Compute the profit for the consignor for the units sold.
(c) Compute the amount of cash that will be remitted by the consignee.
E18-26 (LO3) (Warranty Arrangement) On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of $900. At December 31, 2017, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty.
Instructions
(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for $800.
E18-27 (LO3) (Warranties) Celic Inc. manufactures and sells computers that include an assurance-type warranty for the first 90 days. Celic offers an optional extended coverage plan under which it will repair or replace any defective part for 3 years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Celic determines that the 3 years of extended coverage represents a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is $3,600 on October 1, 2017, and Celic determines the standalone selling price of each is $3,200 and $400, respectively. Further, Celic estimates, based on historical experience, it will incur $200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,440. Assume that the $200 in costs to repair defects in the computers occurred on October 25, 2017.
Instructions
(a) Prepare the journal entry(ies) to record the October transactions related to sale of the computers.
(b) Briefly describe the accounting for the service-type warranty after the 90-day assurance-type warranty period.
E18-28 (LO4) (Existence of a Contract) On January 1, 2017, Gordon Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for $3,000. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Gordon identifies two performance obligations and allocates $1,200 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is $700; the shelves have a cost of $320.
Instructions
(a) Prepare the journal entry on January 1, 2017, for Gordon.
(b) Prepare the journal entry on February 5, 2017, for Gordon when the wiring base is delivered to the customer.
(c) Prepare the journal entry on February 25, 2017, for Gordon when the shelving unit is delivered to the customer and Gordon receives full payment.
E18-29 (LO4) (Contract Modification) In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for $15,000 ($100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional $4,275 ($95 per station). All sales are cash on delivery.
Instructions
(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.
(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.
(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.
E18-30 (LO4) (Contract Modification) Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.
Instructions
(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.
(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.
(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.
E18-31 (LO4) (Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of $2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of $27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of $12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment $3,000, loading equipment controllers $6,000, and special testing and OSHA inspection fees $2,000 (some of Dan’s projects are on government property).
Instructions
(a) Determine the costs that should be capitalized as part of Rex’s Reclaimers revenue arrangement with Dan’s
Demolition.
(b) Dan’s also expects to incur general and administrative costs related to this contract, as well as costs of wasted materials and labor that likely cannot be factored into the contract price. Can these costs be capitalized? Explain.
E18-32 (LO4) (Contract Costs, Collectibility) Refer to the information in E18-31.
Instructions
(a) Does the accounting for capitalized costs change if the contract is for 1 year rather than 3 years? Explain.
(b) Dan’s Demolition is a startup company; as a result, there is more than insignificant uncertainty about Dan’s ability to make the 6-month payments on time. Does this uncertainty affect the amount of revenue to be recognized under the contract? Explain.
E18-33 (LO5,6) (Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2019. The following information is available. *
2017 2018 2019
Costs incurred to date $400,000 $825,000 $1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
Instructions
(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2018.
(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.
E18-34 (LO5) (Analysis of Percentage-of-Completion Financial Statements) In 2017, 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, 2017, are shown below…
Instructions
(a) How much cash was collected in 2017 on this contract?
(b) What was the initial estimated total income before tax on this contract?
(AICPA adapted)
E18-35 (LO5) EXCEL (Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of $2,000,000. The fixed fee stipulated in the contract is $450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of $800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is $1,200,000. Altom was billed $600,000 under the contract.
Instructions
Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form. (AICPA adapted)
E18-36 (LO5,6) (Recognition of Revenue on Long-Term Contract and Entries) Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2017, Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000. Other details follow:...
Instructions
(a) What portion of the total contract price would be recognized as revenue in 2017? In 2018?
(b) Assuming the same facts as those above except that Hamilton uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2018?
(c) Prepare a complete set of journal entries for 2017 (using the percentage-of-completion method).
E18-37 (LO5,6) (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Yanmei Construction Company began operations on January 1, 2017. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the facility is $6,000,000. During the year, Yanmei incurred $1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is $4,204,200. Lundquist Corp. was billed and paid 25% of the contract price.
Instructions
Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2017, and the amount to be shown as “costs and recognized profit in excess of billings” or “billings in excess of costs and recognized profit” at December 31, 2017, under each of the following methods. Show supporting computations in good form.
(a) Completed-contract method.
(b) Percentage-of-completion method.
(AICPA adapted)
E18-38 (LO8) (Franchise Entries) Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement (which covers 3 years), a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement is signed on May 1, 2017, and the franchise commences operation on July 1, 2017.
Instructions
Prepare the journal entries in 2017 for the franchisor under the following assumptions. (Round to the nearest dollar.)
(a) No future services are required by the franchisor once the franchise starts operations.
(b) The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise.
(c) The total franchise fee includes training services (with a value of $2,400) for the period leading up to the franchise opening and for 2 months following opening.
E18-39 (LO8) (Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering
5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.
Instructions
(a) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement.
(b) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of $3,600.
(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.
