EXERCISES
Exercise 5-1
Installment sales;
alternative
recognition
methods
 LO5-1 LO5-3
On June 1, 2013, the Luttman and Dowd Company sold inventory to the
Ushman Corporation for $400,000. Terms of the sale called for a down
payment of $100,000 and four annual installments of $75,000 due on each June
1, beginning June 1, 2014. Each installment also will include interest on the
unpaid balance applying an appropriate interest rate. The inventory cost Foster
$150,000. The company uses the perpetual inventory system.
Required:
1. Compute the amount of gross profit to be recognized from the installment
sale in 2013, 2014, 2015, 2016, and 2017 using point of delivery revenue
recognition. Ignore interest charges.
2. Repeat requirement 1 applying the installment sales method.
3. Repeat requirement 1 applying the cost recovery method.
Exercise 5-2
Construction
accounting;
percentage-ofcompletion and
completed contract
methods
 LO5-5
The Ugenti Construction Company contracted to construct a warehouse
building for $2,600,000. Construction began in 2013 and was completed in
2014. Data relating to the contract are summarized below:
2013
2014
Costs incurred during the year ................. $ 360,000
$1,650,000
Estimated costs to complete as of 12/31 ..
1,560,000
Billings during the year ...........................
430,000
2,170,000
Cash collections during the year ..............
320,000
2,280,000
Required:
1. Compute the amount of gross profit or loss to be recognized in 2013 and
2014 using the percentage-of-completion method.
2. Compute the amount of gross profit or loss to be recognized in 2013 and
2014 using the completed contract method.
3. Prepare a partial balance sheet to show how the information related to this
contract would be presented at the end of 2013 using the percentage-of
completion method.
4. Prepare a partial balance sheet to show how the information related to this
contract would be presented at the end of 2013 using the completed contract
method.
Alternate Exercises and Problems
© The McGraw-Hill Companies, Inc., 2013
5-1
Exercise 5-3
Percentage-ofcompletion
method; loss
projected on entire
project
 LO5-5
On April 13, 2013, the Pagano Construction Company entered into a threeyear construction contract to build a mall for a price of $12,000,000. During
2013, costs of $3,000,000 were incurred with estimated costs of $6,000,000 yet
to be incurred. Billings of $3,800,000 were sent and cash collected was
$3,250,000.
In 2014, costs incurred were $4,000,000 with remaining costs estimated to be
$5,600,000. 2014 billings were $3,500,000 and $3,600,000 cash was collected.
The project was completed in 2015 after additional costs of $5,800,000 were
incurred. The company’s fiscal year-end is December 31. Arrow uses the
percentage-of-completion method.
Required:
1. Calculate the amount of gross profit or loss to be recognized in each of the
three years.
2. Prepare journal entries for 2013 and 2014 to record the transactions
described (credit “Various accounts” for construction costs incurred).
3. Prepare a partial balance sheet to show the presentation of the project as of
December 31, 2013 and 2014.
Exercise 5-4
Franchise sales;
revenue
recognition
 LO5-6
On November 15, 2013, the Coldstone Ice Cream Company entered into a
franchise agreement with an individual. In exchange for an initial franchise fee
of $25,000, Coldstone will provide initial services to the franchisee to include
assistance in design and construction of the building, help in training employees,
help in obtaining financing, and management advice over the first five years of
the ten-year franchise agreement.
50% of the initial franchise fee is payable on November 15, 2013, with the
remaining $12,500 payable in five equal annual installments beginning on
November 15, 2014. These installments will include interest at an appropriate
rate. The franchise opened for business on February 15, 2014.
Required:
Assume that the initial services to be performed by Coldstone subsequent to
November 15, 2013, are substantial and that collectibility of the installment
receivable is reasonably certain. Substantial performance of the initial
services is deemed to have occurred when the franchise opened. Prepare the
necessary journal entries for the following dates (ignoring interest charges):
1. November 15, 2013, and
2. February 15, 2014.
© The McGraw-Hill Companies, Inc., 2013
5-2
Intermediate Accounting, 7/e
Exercise 5-5
Evaluating
efficiency of asset
management
The year 2013 income statement of Garret & Sons Music Company reported
net sales of $10 million, cost of goods sold of $6 million, and net income of $1
million. The following table shows the company's comparative balance sheets
for 2013 and 2012:
 LO5-7
($ in 000s)
Assets:
Cash...............................................................
Accounts receivable ......................................
Inventory .......................................................
Property, plant, and equipment (net) .............
Total assets ...............................................
Liabilities and Shareholders’ Equity:
Current liabilities ..........................................
Notes payable ................................................
Paid-in capital ...............................................
Retained earnings ..........................................
Total liabilities and shareholders equity ...
2013
$ 240
800
850
2,600
$4,490
2012
$ 280
600
700
2,520
$4,100
$ 720
600
2,000
1,170
$4,490
$ 650
1,000
2,000
450
$4,100
Some industry averages for the company’s line of business are:
_______________________________________
inventory turnover
6
times
average collection period 28
days
asset turnover
2
times
_______________________________________
Required:
Assess Garret & Son's asset management relative to its industry.
Alternate Exercises and Problems
© The McGraw-Hill Companies, Inc., 2013
5-3
Exercise 5-6
Profitability ratios
The following condensed information
Manufacturing, Inc. for 2013 and 2012:
was
reported
by
Sanders
($ in 000s)
 LO5-7
Income statement information:
Net sales
Net income
Balance Sheet information:
Current assets ...........................................
Property, plant, and equipment (net) ........
Total assets ............................................
Current liabilities .....................................
Long-term liabilities .................................
Paid-in capital ..........................................
Retained earnings .....................................
Liabilities and shareholders’ equity ......
2013
2012
$7,200
360
$6,800
408
$ 800
2,100
$2,900
$ 250
950
1,000
700
$2,900
$ 750
1,950
$2,700
$ 400
750
1,000
550
$2,700
Required:
1. Determine the following ratios for 2013:
a. profit margin on sales
b. return on assets
c. return on shareholders’ equity
2. Calculate the DuPont framework for Sanders for 2013.
3. Determine the amount of dividends paid to shareholders during 2013.
© The McGraw-Hill Companies, Inc., 2013
5-4
Intermediate Accounting, 7/e
Exercise 5-7
Uncertain
consideration
Addendum
Mohan Consultants provided Fisher Construction with assistance with
implementing various cost-savings initiatives. Mohan’s contract specifies that it
will receive a flat rate of $30,000 and an additional $10,000 if Fisher reaches a
pre-specified target amount of cost savings. Mohan estimates that there is a
35% chance that Fisher will achieve the cost savings target. Mohan accounts for
this arrangement under the ASU.
Required:
1. Assuming Mohan uses a probability-weighted transaction price, calculate the
amount of the transaction price.
2. Assuming Mohan uses the most likely value as the transaction price, calculate
the amount of the transaction price.
3. Assuming Mohan is trying to apply the revenue recognition rules most
appropriately, do you think the company is more likely to use the probabilityweighted amount or the most likely value? Briefly explain your answer.
4. Assume that Mohan provides a plan for Fisher, but Fisher is responsible for
implementing it. Also assume that Mohan delivers the plan in the first
quarter of the year, but Fisher will be implementing the plan and determining
total cost savings over the entire year. Should Mohan recognize the entire
transaction price when it delivers the plan? Briefly explain your reasoning.
Alternate Exercises and Problems
© The McGraw-Hill Companies, Inc., 2013
5-5
PROBLEMS
Problem 5-1
Installment sales;
alternative
recognition
methods
 LO5-1 LO5-3
On October 31, 2013, the Dionne Company sold merchandise to the Parker
Corporation for $800,000. Terms of the sale called for a down payment of
$200,000 and three annual installments of $200,000 due on each October 31,
beginning October 31, 2014. Each installment also will include interest on the
unpaid balance applying an appropriate interest rate. The book value of the
merchandise on Dionne’s books on the date of sale was $400,000. The
perpetual inventory system is used. The company’s fiscal year end is December
31.
Required:
1. Prepare a table showing the amount of gross profit to be recognized in each
of the four years of the installment sale applying each of the following
methods:
a. Point of delivery revenue recognition.
b. Installment sales method.
c. Cost recovery method.
2. Prepare journal entries for each of the four years applying the three revenue
recognition methods listed in requirement 1. Ignore interest charges.
3. Prepare a partial balance sheet as of the end of 2013 and 2014 listing the
items related to the installment sale applying each of the three methods
listed in requirement 1.
© The McGraw-Hill Companies, Inc., 2013
5-6
Intermediate Accounting, 7/e
Problem 5-2
Percentage-ofcompletion method
In the year 2013, the Malinkrodt Construction Company entered into a
contract to construct a road for Dade County for $15,000,000. The road was
completed in 2015. Information related to the contract is as follows:
 LO5-5
2013
2014
2015
Costs incurred during the year ............ $4,000,000 $4,800,000 $4,200,000
Estimated costs to complete as of
year-end .......................................... 8,000,000 4,000,000
Billings during the year ...................... 3,500,000 5,000,000 6,500,000
Cash collections during the year ......... 2,800,000 5,600,000 6,600,000
Malinkrodt uses the percentage-of-completion method of accounting for
long-term construction contracts.
Required:
1. Calculate the amount of gross profit to be recognized in each of the three
years.
2. Prepare all necessary journal entries for each of the years (credit “Various
accounts” for construction costs incurred).
3. Prepare a partial balance sheet for 2013 and 2014 showing any items related
to the contract.
4. Calculate the amount of gross profit to be recognized in each of the three
years assuming the following costs incurred and costs to complete
information:
2013
2014
2015
Costs incurred during the year ............ $4,000,000 $4,200,000 $7,200,000
Estimated costs to complete as of
year-end .......................................... 8,000,000 7,100,000
-
Alternate Exercises and Problems
© The McGraw-Hill Companies, Inc., 2013
5-7
P 5–3
Upfront fees,
separate
performance
obligations
Addendum
Skinny Zone is a health club that offers members various gym services. SZ
accounts reports under the ASU.
Required:
1. Assume SZ offers a deal whereby enrolling in a new membership also
entitles the member to receive a voucher redeemable for 35 percent off a
year’s worth of premium yoga classes. A new membership costs $500, and
a year’s worth of premium yoga costs an additional $400. SZ estimates that
approximately 25 percent of the vouchers will be redeemed. SZ offers a 15
percent discount on all courses as part of its seasonal promotion strategy.
a. Identify the distinct performance obligations in the new member deal.
b. Allocate the contract price to the distinct performance obligations.
c. Prepare the journal entry to recognize revenue for the sale of a new
membership. Clearly identify revenue or unearned revenue associated
with each distinct performance obligation.
2. Assume SZ offers a “Slimzone” coupon book with 40 pre-paid visits over
the next year. SZ has learned that Slimzone purchasers make an average of
30 visits before the coupon book expires. A customer purchases a Slimzone
book by paying $400 in advance, and for any additional visit over 40 during
the year after the book is purchased, the customer can pay a $12 fee
visitation fee. Depending on the season, SZ typically charges between $10
and $14 to non-members who wish to work out on a single day.
a. Identify the distinct performance obligations in the Slimzone member
deal.
b. Allocate the contract price to the distinct performance obligations.
c. Prepare the journal entry to recognize revenue for the sale of a new
Slimzone book. When will SZ recognize revenue associated with
people using its Slimzone plans?
© The McGraw-Hill Companies, Inc., 2013
5-8
Intermediate Accounting, 7/e