P18-6 (Long-Term Contract with Interim Loss) On March 1, 2010, Pechstein
Construction Company contracted to construct a factory building for Fabrik
Manufacturing Inc. for a total contract price of $8,400,000. The building was completed
by October 31, 2012. The annual contract costs incurred, estimated costs to complete the
contract, and accumulated billings to Fabrik for 2010, 2011, and 2012 are given below.
2010 2011 2012 Contract costs incurred during the year $2,880,000 $2,230,000
$2,190,000 Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0–
Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000 Instructions (a) Using
the percentage-of-completion method, prepare schedules to compute the profit or loss to
be recognized as a result of this contract for the years ended December 31, 2010, 2011,
and 2012. (Ignore income taxes.) (b) Using the completed-contract method, prepare
schedules to compute the profit or loss to be recognized as a result of this contract for the
years ended December 31, 2010, 2011, and 2012. (Ignore incomes taxes.)
(a)
Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2010
Costs to date (12/31/10) ......................................................................
Estimated costs to complete ..............................................................
Estimated total costs ................................................................
$2,880,000
3,520,000
$6,400,000
Percent complete ($2,880,000 ÷ $6,400,000) ....................................
45%
Revenue recognized ($8,400,000 X 45%) .........................................
Costs incurred ....................................................................................
Profit recognized in 2010 ...................................................................
$3,780,000
2,880,000
$ 900,000
2011
Costs to date (12/31/11)
($2,880,000 + $2,230,000)...............................................................
Estimated costs to complete ..............................................................
Estimated total costs ................................................................
Percent complete ($5,110,000 ÷ $7,300,000) ....................................
Revenue recognized in 2011 .. ($8,400,000 X 70%) – $3,780,000
Loss recognized in 2011 .....................................................................
2012
$5,110,000
2,190,000
$7,300,000
70%
$2,10
$ (130,000)
Total revenue recognized ..................................................................
Total costs incurred ...........................................................................
Total profit on contract .....................................................................
Deduct profit previously recognized
($900,000 – $130,000) .....................................................................
Profit recognized in 2012 ...................................................................
770,000
$ 330,000*
*Alternative
Revenue recognized in 2012
($8,400,000 X 30%) ........................................................................
Costs incurred in 2012 .......................................................................
Profit recognized in 2012 ...................................................................
$2,520,000
2,190,000
$ 330,000
(b)
$8,400,000
7,300,000
1,100,000
Computation of Recognizable Profit/Loss
Completed-Contract Method
2010—NONE
2011—NONE
2012
Total revenue recognized ..................................................................
Total costs incurred ...........................................................................
Profit recognized in 2012 ...................................................................
$8,400,000
7,300,000
$1,100,000
Question #2 Lazaro, Inc. sells goods on the installment basis and uses the installmentsales method. Due to a customer default, Lazaro repossessed merchandise that was
originally sold for $800, resulting in a gross profit rate of 40%. At the time of
repossession, the uncollected balance is $520, and the fair value of the repossessed
merchandise is $275. Prepare Lazaro's entry to record the repossession. (List multiple
debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.) Debit Credit
Repossessed Merchandise ? Deferred Gross Profit ? Loss on repossession ? Installment
accounts receivable ?
Repossessed Merchandise .............................................................................
Loss on Repossession .....................................................................................
Deferred Gross Profit ($520 X 40%) ............................................................
Installment Accounts Receivable ........................................................
275
37*
208
520
*[$275 – ($520 – $208)]
Question # 3 Jansen Corporation shipped $20,000 of merchandise on consignment to
Gooch Company. Jansen paid freight costs of $2,000. Gooch Company paid $500 for
local advertising which is reimbursable from Jansen. By year-end, 60% of the
merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10%
commission, and remitted the cash due to Jansen. Prepare Jansen's entry when the cash is
received. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
Debit Credit Cash ? commission expense ? advertising expense ? revenue from
consignment sales ? Cost of goods sold ? Inventory on consignment ?
Cash ...................................................................................................18,850*
Advertising Expense ......................................................................................
Commission Expense .....................................................................................
Revenue from Consignment Sales ......................................................
500
2,150
21,500
*[$21,500 – $500 – ($21,500 X 10%)]
Cost of Goods Sold .........................................................................................
Inventory on Consignment ..................................................................
[60% X ($20,000 + $2,000)]
13,200
13,200