Acct 387
Spring 2002
Total of 30 points
Chap. 19 Class Learning Team Assignment
Team SOLUTION
Due 2/28
Journal entries—percentage-of-completion. (10 pts)
In 1999, the Hap Construction Company was awarded a contract to construct a bridge at a total
contract price of $12,000,000. $2,000,000 of costs were incurred in 1999 on the contract. The
estimated future costs to complete the project at the end of 1999 were $6,000,000, progress billings
on the contract in 1999 totaled $2,500,000. Gross profit recognized on the contract in 1999 was
$1,000,000. Collections of progress billings were $1,500,000 in year 1999.
$5,500,000 of costs were incurred in 2000 on the contract (i.e., $7,500,000 of TOTAL construction
costs were incurred on the contract through the end of 2000). The estimated future costs to complete
the project at the end of 2000 were $2,500,000. Progress billings through the end of 2000 totaled
$6,500,000 (i.e., $4,000,000 was billed in 2000). Collections of progress billings were $4,500,000 in
year 2000
Instructions
(a)
(b)
(c)
(d)
(e)
Prepare a summary entry to record construction costs for year 2000
Prepare a summary entry to record progress billings for year 2000
Prepare a summary entry to record collections of progress billings for year 2000
Prepare the entry to recognize profit for year 2000, on a percentage-of-completion basis.
The balance in Accounts Receivable (related to the bridge contract) at the end of year 2000 is
$500,000
(a) Construction in Process .................................. 5,500,000
Materials, Cash, Payable, Etc. ...............................
5,500,000
(b) Accounts Receivable ......................................................... 4,000,000
Billings on Construction in Process ....................
4,000,000
(c)
Cash .................................................................................. 4,000,000
Accounts Receivable ..............................................
4,000,000
(d) Construction Expenses .................................................... 5,500,000
Construction in Process (75% complete) ....................... 500,000
Revenue from Long-term Contract .......................
6,000,000
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Percentage-of-completion and completed-contract methods. (8pts)
On February 1, 2000, Neer Contractors agreed to construct a building at a contract price of
$6,000,000. Neer estimated total construction costs would be $5,000,000 on 2/1/2000 and the
project would be finished in 2002. Information relating to the costs and billings for this contract is as
follows:
2000
2001
2002
Total costs incurred to date
$1,500,000
$3,920,000
$5,700,000
Estimated costs to complete at year end 3,500,000
1,680,000
-0Customer billings to date
2,700,000
4,000,000
6,000,000
Collections to date
2,000,000
3,500,000
5,900,000
Percentage complete at year end
30%
70%
100%
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and
for completed-contract accounting, show the gross profit that should be recorded for 2000, 2001, and
2002. (Note: round completion %'s to 3 decimal places when doing calculations)
Percentage-of-Completion
Gross Profit
2000
$300,000
2001
($20,000)
2002
$ 20,000
2000
2001
2002
Completed-Contract
Gross Profit
$0
$0
$300,000
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Installment sales. (6pts)
Tanner Furniture Company concluded its first year of operations in which it made sales of
$1,000,000, all on installment. Collections during the year from down payments and installments
totaled $300,000. Purchases for the year totaled $800,000 recorded as a debit to inventory; the cost
of merchandise on hand at the end of the year was $200,000.
Instructions
Using the installment method, make summary entries to record:
(a) cost of goods sold;
(b) installment sales
(c) cash collections;
(d) unrealized gross profit;
(e) realized gross profit.
(a)
Cost of Installment Sales .................................................
Inventory .................................................................
600,000
600,000
(b) Installment Accounts Receivable .................................... 1,000,000
Installment Sales ....................................................
1,000,000
(c)
Cash ...................................................................................
Installment Accounts Receivable .........................
300,000
300,000
(d) Installment Sales .............................................................. 1,000,000
Cost of Installment Sales ......................................
Deferred Gross Profit (40%) ..................................
(e)
Deferred Gross Profit (40% × $300,000) ..........................
Realized Gross Profit on Installment Sales .........
600,000
400,000
120,000
120,000
Installment sales Repossessions. (2pts)
Carlin Co. had installment sales of $800,000 and cost of installment sales of $560,000 in 2001. A
2001 sale resulted in a default in 2003, at which time the balance of the installment receivable was
$10,000. The repossessed merchandise had a fair value of $5,500.
Instructions
Make the entry to record the repossession.
Repossessed Merchandise ...............................................
Deferred Gross Profit, 2001 (.30 × $10,000) ......................
Loss on Repossession ......................................................
Installment Account Receivable, 2001 .......................
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5,500
3,000
1,500
10,000
Essay Question 4 points:
The Ag Parts Corp. manufactures tractor parts. The company has reported a profit every year
since inception in 1974. However, 2001 has been a tough year and prospects for being profitable
for the year are bleak. Tony Smith, the companies marketing manager, has determined a way to
increase December sales, the last month of the Corp.'s fiscal year, by an amount sufficient to
report a profit for 2001. He suggests to the CEO (Chief Executive Officer) that the company run a
special sales campaign for the month of December 2001, during which time they will discount
prices by 15% to all customers that purchase at least 5 times more than their average monthly
purchases for the past 11 months. There is no doubt that this policy, if implemented, would result
in 2001 being profitable.
The CEO has asked you as the CFO (Chief Financial Officer) to indicate whether or not you
would be in favor of implementing such a sales campaign? Number in your group in favor of the
sales campaign____
Number in your group against the sales campaign
.
What do you see as the potential short-term (Year 2001) and long-term (Years 2002 and beyond)
impact on the firm's financial statements, if the sales campaign is implemented.
In the short-term (Year 2001) net income is going to increase, since the sales campaign
gives a strong economic incentive to customers to buy goods in December 2001. It is also
likely that most of the increased sales volume in December 2001 will reduce sales that
would have otherwise been made in the next year (Year 2002). Thus, unless there is a
general increase in demand for the company's products in Year 2002 and/or significant
cost reductions in Year 2002, the Company will likely have to have a similar campaign in
December 2002 in order to stimulate sales and report profits.
Additionally, if customers begin to expect that Ag Parts routinely has a December year end
sales campaign it is likely going to be necessary to continue having such campaigns in
future years in order to maintain sales.