EXERCISE 18-23 (10–15 minutes)
(a) Realized gross profit recognized in 2013 under the installmentsales method of accounting is $83,000. When gross profit is
expressed as a percentage of cost, it must be converted to
percentage of sales to compute the realized gross profit under the
installment-sales method of accounting. Thus, 2012 and 2013
gross profits as a percentage of sales are 20% and 21.875%
respectively.
Sale Year
Gross Profit Percentage
2012
2013
.25/(1.00 + .25) = 20%
.28/(1.00 + .28) = 21.875%
TOTAL
2013
Collections
$240,000
160,000
2013
Realized Profit
$48,000
35,000
$83,000
(Note to instructor: The problem provides gross profit as a percent of
cost.)
(b) The balance of “Deferred Gross Profit” could be reported on the
balance sheet for 2013:
1.
As a current liability on the theory that it is related to
Installment Accounts Receivables that are normally treated
as current assets;
2.
As a deferred credit between liabilities and stockholders’
equity. This treatment is criticized because there is no
obligation to outsiders; or
3.
As an adjustment or offset to the related Installment
Accounts Receivable. This is because the deferred gross profit
is a part of revenue from installment sales not yet realized.
The related receivable will be overstated unless the deferred
gross
profit
is
deducted.
On the other hand, the amount of deferred gross profit has
no direct relationship with the estimated collectibility of the
accounts receivable.
It is not a settled matter as to the proper classification of
“deferred gross profit” on the balance sheet when the
installment-sales method of accounting is used to measure
income. As indicated in the text, the FASB in Statement of
Financial Accounting Concepts No. 6 indicates that it conceptually
is an asset valuation. We support the FASB position.
(c) Gross profit as a percent of sales in 2012 is 20% (as computed in
(a) above); gross profit therefore is $96,000 ($480,000 X .20) and
the cost of 2012 sales is $384,000 ($480,000 – $96,000). Because
the amounts collected in 2012 ($130,000) and 2013 ($240,000) do
not exceed the total cost of $384,000, no profit is recognized in
2012 or 2013 on 2012 sales. Also, no profit is recognized on 2013
sales since the collections of $160,000 do not exceed the total cost
of $484,375 [$620,000 X (1 – .21875)].
EXERCISE 18-23 (10–15 minutes)
(a) Realized gross profit recognized in 2013 under the installmentsales method of accounting is $83,000. When gross profit is
expressed as a percentage of cost, it must be converted to
percentage of sales to compute the realized gross profit under the
installment-sales method of accounting. Thus, 2012 and 2013 gross
profits as a percentage of sales are 20% and 21.875%
respectively.
EXERCISE 18-23 (Continued)
Sale Year
Gross Profit Percentage
2012
2013
.25/(1.00 + .25) = 20%
.28/(1.00 + .28) = 21.875%
TOTAL
2013
Collections
$240,000
160,000
2013
Realized Profit
$48,000
35,000
$83,000
(Note to instructor: The problem provides gross profit as a percent of
cost.)
(b) The balance of “Deferred Gross Profit” could be reported on the
balance sheet for 2013:
1.
As a current liability on the theory that it is related to
Installment Accounts Receivables that are normally treated
as current assets;
2.
As a deferred credit between liabilities and stockholders’
equity. This treatment is criticized because there is no
obligation to outsiders; or
3.
As an adjustment or offset to the related Installment
Accounts Receivable. This is because the deferred gross profit
is a part of revenue from installment sales not yet realized.
The related receivable will be overstated unless the deferred
gross
profit
is
deducted.
On the other hand, the amount of deferred gross profit has
no direct relationship with the estimated collectibility of the
accounts receivable.
It is not a settled matter as to the proper classification of
“deferred gross profit” on the balance sheet when the
installment-sales method of accounting is used to measure
income. As indicated in the text, the FASB in Statement of
Financial Accounting Concepts No. 6 indicates that it conceptually
is an asset valuation. We support the FASB position.
(c) Gross profit as a percent of sales in 2012 is 20% (as computed in
(a) above); gross profit therefore is $96,000 ($480,000 X .20) and
the cost of 2012 sales is $384,000 ($480,000 – $96,000). Because
the amounts collected in 2012 ($130,000) and 2013 ($240,000) do
not exceed the total cost of $384,000, no profit is recognized in
2012 or 2013 on 2012 sales. Also, no profit is recognized on 2013
sales since the collections of $160,000 do not exceed the total cost
of $484,375 [$620,000 X (1 – .21875)].
EXERCISE 18-24 (15–20 minutes)
(a) Computation of gross profit realized—cost-recovery method:
Cash
Year
Received
Beginning balance
—
2012
$120,000
2013
90,000
2014
40,000
Original
Cost
Recovered
—
$120,000
30,000
0
Balance of
Unrecovered
Cost
$150,000
30,000
0
0
Gross
Profit
Realized
—
$0
60,000
40,000
(b) Computation of gross profit realized—installment-sales method:
Gross profit rate: ($250,000 – $150,000) ÷ $250,000 = 40%
2012 Gross profit realized:
2013 Gross profit realized:
2014 Gross profit realized:
$120,000 X 40% = $48,000
$ 90,000 X 40% = $36,000
$ 40,000 X 40% = $16,000
EXERCISE 18-15 (25–30 minutes)
(a) 1.
Gross profit recognized in 2012:
Contract price ...............................................
Costs:
Costs to date .........................................
Estimated additional costs ...................
Total estimated profit ...................................
Percentage completion to date
($280,000/$800,000) ..................................
Gross profit recognized in 2012 ..................
Gross profit recognized in 2013:
Contract price ...............................................
Costs:
Costs to date .........................................
Estimated additional costs ...................
Total estimated profit ...................................
Percentage completion to date
($600,000/$800,000) ..................................
Total gross profit recognized ......................
Less: Gross profit recognized in 2012 .......
Gross profit recognized in 2013 ..................
$1,200,000
$280,000
520,000
800,000
400,000
X
35%
$ 140,000
$1,200,000
$600,000
200,000
800,000
400,000
X
75%
300,000
140,000
$ 160,000
EXERCISE 18-15 (Continued)
2.
Construction in Process ($600,000 – $280,000) .... 320,000
Materials, Cash, Payables .............................
320,000
Accounts Receivable ($500,000 – $150,000) ........ 350,000
Billings on Construction in Process .............
350,000
Cash ($320,000 – $120,000) ................................... 200,000
Accounts Receivable .....................................
200,000
Construction in Process ....................................... 160,000
Construction Expenses ......................................... 320,000
Revenue from Long-Term Contracts ............
480,000*
*$1,200,000 X [($600,000 – $280,000) ÷ $800,000]
(b) Income Statement (2013)—
Gross profit on long-term construction contract .........
Balance Sheet (12/31/13)—
Current assets:
Receivables—construction in process..................
Inventories—construction in process totaling
$900,000** less billings of $500,000 ...................
**$180,000 = $500,000 –
**Total cost to date
2012 Gross profit
2013 Gross profit
$320,000
$600,000
140,000
160,000
$900,000
$160,000
$180,000*
$400,000
EXERCISE 18-6 (15–20 minutes)
(a) Uddin could recognize revenue at the point of sale based upon the
time of shipment because the books are sold f.o.b. shipping point.
Because of the return policy one might argue in favor of the cash
collection basis. Because the returns can be estimated, one could
argue for shipping point less estimated returns.
EXERCISE 18-6 (continued)
(b) Based on the available information and lack of any information
indicating that any of the criteria in GAAP were not met, the correct
treatment is to report revenue at the time of shipment as the
gross amount less the 12% normal return factor. This is
supported by the legal test of transfer of title and the criteria in
GAAP. One could be very conservative and use the 30% maximum
return allowance.
(c) Accounts Receivable .....................................
Sales Revenue (Texts) ............................
15,000,000
Sales Returns and Allowances* ....................
Allowance for Sales Returns and
Allowances ($15,000,000 X 12%) ......
1,800,000
(d) Sales Returns and Allowances* ....................
Allowance for Sales Returns and
Allowances ................................................
Accounts Receivable ..............................
200,000
Cash ................................................................
Accounts Receivable ..............................
15,000,000
1,800,000
1,800,000
2,000,000
13,000,000
*A debit to Sales Revenue could also be made here.
13,000,000