CHAPTER 18
Revenue Recognition
OPTIONAL ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
BE18-7
BE18-9
BE18-10
BE18-12
BE18-13
BE18-15
Journal entries under percentage-of-completion method.
Journal entries under completed-contract method.
Balance sheet presentation of construction contract.
Installment-sales method entries.
Installment-sales default & repossession.
Cost-recovery method.
E18-14
E18-15
E18-16
E18-17
E18-18
E18-19
E18-23
E18-25
E18-26
Gross profit on uncompleted contract.
Recognition of profit, percentage-of-completion.
Recognition of revenue on long-term contract and entries.
Recognition of profit and balance sheet amounts for long-term contracts.
Long-term contract reporting.
Installment-sales method calculations, entries.
(a. and c. only) Installment-sales method and cost-recovery method.
(case 2) Installment-sales default & repossession.
Installment-sales default & repossession (repossession/reconditioning entry only).
P18-2
P18-4
P18-6
P18-9
P18-11
P18-17
Recognition of profit on long-term contract.
Recognition of profit and balance sheet presentation, percentage-of-completion.
Long-term contract with interim loss.
Installment-sales income statements (just calculate gross profit realized for each year).
Installment-sales entries
(a. , b., and c. only) Comprehensive problem—long-term contracts.
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BRIEF EXERCISE 18-7
Construction in Process ................................................................................
Cash, Materials, Payables, etc. ..........................................................
1,700,000
Accounts Receivable .....................................................................................
Billings on Construction in Process ....................................................
1,200,000
Cash ............................................................................................................
Accounts Receivable ..........................................................................
960,000
Construction in Process [($1,700,000 / 5,000,000) = 34% X $2,000,000] ...
Construction Expenses .................................................................................
Revenue from Construction Contract ($7,000,000,000 X 34%) .........
680,000
1,700,000
1,700,000
1,200,000
960,000
2,380,000
BRIEF EXERCISE 18-9
Construction in Process ......................................................................................
Cash, Materials, Payables, etc. ................................................................
1,700,000
Accounts Receivable ...........................................................................................
Billings on Construction in Process ..........................................................
1,200,000
Cash ..................................................................................................................
Accounts Receivable ................................................................................
960,000
1,700,000
1,200,000
960,000
BRIEF EXERCISE 18-10
Current Assets
Accounts Receivable ...............................................................................
Inventories
Construction in process ................................................................
Less: Billings ................................................................................
Costs in excess of billings .................................................................
$240,000
$1,715,000
1,000,000
715,000
BRIEF EXERCISE 18-12
Installment Accounts Receivable .......................................................................
Installment Sales .....................................................................................
150,000
Cost of Installment Sales ........................................................................................
Inventory ......................................................................................................
102,000
Cash .................................................................................................................
Installment Accounts Receivable ............................................................
150,000
102,000
54,000
54,000
Installment Sales .......................................................................................................
Cost of Installment Sales ................................................................................
Deferred Gross Profit .....................................................................................
150,000
Deferred Gross Profit ...............................................................................................
Realized Gross Profit (32% X $54,000) .........................................................
[gross profit % = ($150,000 − $102,000) = $48,000 / $150,000 = 32%]
17,280
102,000
48,000
17,280
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BRIEF EXERCISE 18-13
Repossessed Inventory ......................................................................................
Deferred Gross Profit ($520 x 40%) .......................................................................
Loss on Repossession .......................................................................................
Installment Accounts Receivable ............................................................
275
208
37
520
BRIEF EXERCISE 18-15
Year
2012
2013
2014
Cash Collections
$10,000
5,000
5,000
Cost Recovery*
$10,000
3,000
0
Gross Profit Realized
$0
2,000
5,000
* must recover $13,000 before Gross Profit realized
EXERCISE 18-14
Estimated contract cost at completion ($800,000 + $1,200,000)
Fixed fee .....................................................................................................................
Total contract price .....................................................................................................
Total estimated cost ...................................................................................................
Gross profit .................................................................................................................
Percentage of completion ($800,000 / $2,000,000) ...................................................
Gross profit to be recognized ($450,000 X 40%) .......................................................
$2,000,000
450,000
2,450,000
2,000,000
450,000
40%
$ 180,000
EXERCISE 18-15
(a) (1)
Contract price (revenue)
Costs incurred to date
Estimated costs to complete
Estimated total costs
Estimated total profit
2012
$1,200,000
280,000
520,000
800,000
$400,000
% completion for 2012: $280,000 / $800,000 = 35%
GP = gross profit
2012: $400,000 x 35% = $140,000 − $0
2013: $400,000 x 75% = $300,000 − $140,000
(a)
2.
2013
$1,200,000
600,000
200,000
800,000
$400,000
for 2013: $600,000 / $800,000 = 75%
GP recognized
$140,000
160,000
Construction in Process ($600,000 – $280,000) .........................................
Cash, Materials, Payables, etc. ......................................................
320,000
Accounts Receivable ($500,000 – $150,000) ...........................................
Billings on Construction in Process ................................................
350,000
Cash ($320,000 – $120,000) .....................................................................
Accounts Receivable ......................................................................
200,000
Construction in Process .............................................................................
Construction Expenses ..............................................................................
Revenues from Construction Contracts [$1,200,000 X (75% – 35%)]
160,000
320,000
320,000
350,000
200,000
480,000
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EXERCISE 18-15 continued
(b)
Income Statement (2013)
Revenues from Construction Contracts ...................................................$480,000
Construction Expenses ...............................................................................320,000
Gross profit on long-term construction contract ......................................................
Balance Sheet (12/31/13)
Current assets:
Accounts Receivable ($500,000 – $320,000)...............................................
Inventories:
Construction in Process ($600,000 + $300,000) .................... $900,000
Less: Billings .......................................................................... (500,000)
Costs and recognized profit in excess of billings ....................................
$160,000
$180,000
$400,000
EXERCISE 18-16
(a)
Contract price (revenue)
Costs incurred during year
Costs incurred to date
Estimated costs to complete
Estimated total costs
Estimated total profit
2012
$2,200,000
$640,000
640,000
960,000
1,600,000
$600,000
2013
$2,200,000
$1,425,000
2,065,000
0
2,065,000
$135,000
% completion for 2012: $640,000 / $1,600,000 = 40%
2012: $2,200,000 x 40% = $880,000 − $0
2013: $2,200,000 x 100% = $2,200,000 − $880,000
Revenue recognized
$ 880,000
1,320,000
(b)
All $2,200,000 of the contract price is recognized as revenue in 2013.
(c)
Construction in Process...............................................................................
Cash, Materials, Payables, etc. ........................................................
640,000
Accounts Receivable ...................................................................................
Billings on Construction in Process ..................................................
420,000
Cash ..........................................................................................................
Accounts Receivable ........................................................................
350,000
Construction Expenses................................................................................
Construction in Process ($600,000 x 40%) .................................................
Revenue from Construction Contract ..............................................
640,000
240,000
640,000
420,000
350,000
880,000
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EXERCISE 18-17
Contract price (revenue)
Costs incurred to date
Estimated costs to complete
Estimated total costs
Estimated total profit
(a)
2012
$6,000,000
1,185,800
4,204,200
5,390,000
$610,000
Gross Profit to Be Recognized: $0; no gross profit to be recognized prior to completion of contract.
Billings in Excess of Costs:
Construction in Process..............................................................................................
Billings ($6,000,000 x 25%) ........................................................................................
Billings in Excess of Costs .........................................................................................
(b)
$ 1,185,800
(1,500,000)
$ (314,200)
Gross Profit to Be Recognized:
Percentage-of-completion: ($1,185,800 / $5,390,000) = 22%
Gross profit to be recognized: ($610,000 X 22%) = $ 134,200
Billings and Recognized Profits in Excess of Costs:
Construction in Process ($1,185,800 + $134,200) .....................................................
Billings ($6,000,000 x 25%) ........................................................................................
Billings and Recognized Profits in Excess of Costs ...................................................
$ 1,320,000
(1,500,000)
$ (180,000)
EXERCISE 18-18
BERSTLER CONSTRUCTION COMPANY
Partial Income Statement
Year Ended December 31, 2012
Revenue from construction contract (Project 3) ......................................................................
Construction expenses (Project 3) ..........................................................................................
Gross profit ..............................................................................................................................
Loss on construction contract (Project 1)* ..............................................................................
* Contract price..............................................................................
Total estimated costs ($450,000 + $130,000) ............................
Total estimated loss (recognize in 2010) ....................................
$520,000
330,000
190,000
(20,000)
$ 560,000
580,000
$ (20,000 )
BERSTLER CONSTRUCTION COMPANY
Partial Balance Sheet
December 31, 2012
Current assets:
Accounts receivable ($1,080,000 – $990,000) .......................................
Inventories:
Construction in process ($450,000 – $20,000) ..............................
Less: Billings ...............................................................................
Costs and recognized loss in excess of billings (Project 1) ........
Current liabilities:
Billings on construction contract ..................................................
Construction in process ................................................................
Billings in excess of costs (Project 2) ..........................................
$90,000
$430,000
(360,000)
$70,000
$220,000
126,000
$94,000
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EXERCISE 18-19
(a)
Gross profit rate:
2012: ($900,000 – $594,000) / $900,000
2013: ($1,000,000 – $680,000) / $1,000,000
Gross profit realized:
2012: $370,000 X 34%
2013: on 2012 = $350,000 X 34%
on 2013 = $450,000 X 32%
Total
(b)
2012
2013
34%
32%
$125,800
$125,800
$119,000
144,000
$263,000
Installment Accounts Receivable ...........................................................
Installment Sales .........................................................................
1,000,000
Cost of Installment Sales ........................................................................
Inventory ......................................................................................
680,000
Cash ($350,000 + $450,000) ......................................................................
Installment Accounts Receivable ..........................................................
800,000
Installment Sales ..........................................................................................
Cost of Installment Sales ...................................................................
Deferred Gross Profit .........................................................................
1,000,000
Deferred Gross Profit .....................................................................................
Realized Gross Profit ........................................................................
263,000
1,000,000
680,000
800,000
680,000
320,000
263,000
EXERCISE 18-23 (a. and c. only)
(a)
Must convert gross profit as a percentage of costs to gross profit as a percentage of sales:
2012 = 25% / (100% + 25%) = 20%
2013 = 28% / (100% + 28%) = 21.875%
Gross profit realized:
2013: on 2012 = $240,000 X 20%
on 2013 = $160,000 X 21.875%
Total
$48,000
35,000
$83,000
(c)
2012
2013: on 2010 sales
on 2011 sales
Cash Collections
$130,000
240,000
160,000
Cost Recovery*
$130,000
240,000
160,000
Gross Profit Realized
$0
0
0
* 2012: must recover $384,000 [$480,000 x (100% − 20%)] before GP realized
2013: must recover $484,375 [$620,000 x (100% − 21.875%)] before GP realized
EXERCISE 18-25 (case 2)
Repossessed Inventory ......................................................................................
Deferred Gross Profit [$780 x ($1,500 − $1,200) / $1,500)] ..................................
Installment Accounts Receivable [$1,500 − $240 – ($80 x 6)] ................
Gain on Repossession ............................................................................
750
156
780
126
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EXERCISE 18-26 (repossession/reconditioning entry only)
Repossessed Inventory .....................................................................................
Deferred Gross Profit ($1,300 x 30%) ....................................................................
Loss on Repossession .......................................................................................
Installment Accounts Receivable ($1,800 − $500) ..................................
Cash ........................................................................................................
650
390
320
1,300
60
PROBLEM 18-2
(a)
Contract price
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
(b)
2012
$900,000
270,000
330,000
600,000
$300,000
2013
$900,000
450,000
150,000
600,000
$300,000
% completion for 2012: $270,000 / $600,000 =
for 2013: $450,000 / $600,000 =
45%
75%
GP = gross profit
2012: $300,000 x 45% = $135,000 − $0
2013: $300,000 x 75% = $225,000 − $135,000
2014: $290,000 x 100% = $290,000 − $225,000
GP recognized
$135,000
90,000
65,000
2014
$900,000
610,000
0
610,000
$290,000
In 2012 and 2013, $0 gross profit would be recognized. In 2014, all $290,000 is recognized.
PROBLEM 18-4
(a)
Contract price
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
(b)
2012
$6,600,000
1,620,000
3,780,000
5,400,000
$1,200,000
2013
$6,600,000
3,850,000
1,650,000
5,500,000
$1,100,000
% completion for 2012: $1,620,000 / $5,400,000 =
for 2013: $3,850,000 / $5,500,000 =
30%
70%
GP = gross profit
2012: $1,200,000 x 30% = $360,000 − $0
2013: $1,100,000 x 70% = $770,000 − $360,000
2014: $1,010,000 x 100% = $1,010,000 − $770,000
GP recognized
$360,000
410,000
240,000
2014
$6,510,000
5,500,000
0
5,500,000
$1,010,000
HEWITT CONSTRUCTION COMPANY
Balance Sheet
December 31, 2013
Current assets:
Accounts receivable ($3,300,000 – $2,800,000) ..............
Inventories:
Construction in process ($3,850,000 + $770,000) ....
Less: Billings ...........................................................
Costs and recognized profit in excess of billings
$ 500,000
$4,620,000
(3,300,000)
1,320,000
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PROBLEM 18-6
(a)
Contract price
Costs incurred during year
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
2012
$8,400,000
2,880,000
2,880,000
3,520,000
6,400,000
$2,000,000
2013
$8,400,000
2,230,000
5,110,000
2,190,000
7,300,000
$1,100,000
% completion for 2012: $2,880,000 / $6,400,000 =
for 2013: $5,110,000 / $7,300,000 =
2014
$8,400,000
2,190,000
7,300,000
0
7,300,000
$1,100,000
45%
70%
GP = gross profit
2012: $2,000,000 x 45%
2013: $1,100,000 x 70% = $770,000 − $900,000
2014: $1,100,000 x 100% = $1,100,000 − $770,000
GP (loss) recognized
$900,000
(130,000)
330,000
(b) Profit (loss) recognized under Completed-Contract Method
2012: $0
2013: $0 (contract still has an overall profit)
2014: $1,100,000
PROBLEM 18-9 (just calculate gross profit realized for each year)
2012
Gross profit rate:
2012: ($320,000 − $214,400) / $320,000
2013: ($275,000 − $176,000) / $275,000
2014: ($380,000 − $228,000) / $380,000
Gross profit realized:
2012: $100,000 x 33%
2013: on 2012 = $90,000 x 33%
on 2013 = $110,000 x 36%
2014: on 2012 = $ 40,000 x 33%
on 2013 = $140,000 x 36%
on 2014 = $125,000 x 40%
Total gross profit realized
*
2013
2014
**
33%
36%
40%
$33,000
$29,700
39,600
$33,000
$69,300
$13,200
50,400
50,000
$113,600
PROBLEM 18-11
(a)
Installment Accounts Receivable ................................................................
Installment Sales ..............................................................................
500,000
Cost of Installment Sales .............................................................................
Inventory ...........................................................................................
350,000
Cash ..........................................................................................................
Installment Accounts Receivable ......................................................
180,000
Repossessed Inventory ..........................................................................
Deferred Gross Profit ($24,000 x 30%*)......................................................
Loss on Repossession ............................................................................
Installment Accounts Receivable ......................................................
* gross profit rate = [($500,000 − $350,000) = $150,000 / $500,000 = 30%]
500,000
350,000
180,000
11,200
7,200
5,600
24,000
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PROBLEM 18-11 continued
(a)
(b)
Installment Sales .........................................................................................
Cost of Installment Sales ..................................................................
Deferred Gross Profit ........................................................................
500,000
Deferred Gross Profit...................................................................................
Realized Gross Profit ($180,000 x 30%) ..........................................
54,000
350,000
150,000
54,000
PROBLEM 18-17 (a., b., and c. only)
For both methods:
Contract price
Costs incurred to date
Estimated costs to complete
Estimated total costs
Estimated total profit (loss)
A
$300,000
248,000
72,000
320,000
$(20,000)
B
$350,000
67,800
271,200
339,000
$11,000
C
$280,000
186,000
0
186,000
$94,000
D
$200,000
118,000
87,000
205,000
$(5,000)
E
$240,000
190,000
10,000
200,000
$40,000
A
$(20,000)
B
$11,000
C
$94,000
D
$(5,000)
E
$40,000
(a) Schedule to compute gross profit (loss):
Estimated total profit (loss)
Percentage-of-completion:
A:
(not applicable; 100% since loss)
B:
($67,800 / $339,000)
C:
($186,000 / $186,000)
D:
(not applicable; 100% since loss)
E:
($190,000 / $200,000)
Gross profit (loss) recognized
—
20%
100%
—
$(20,000)
$ 2,200
$94,000
$(5,000)
95%
$38,000
Schedule to Compute ―Costs and Recognized Profits (Losses) in Excess of Billings‖ or ―Billings in Excess of
Costs and Recognized Profit‖ (note that CIP & Billings accounts are closed out for Project C since complete)
Costs & Recognized
Profits (Losses)
a
$228,000
b
70,000
c
113,000
d
228,000
A
B
D
E
a
$248,000 – $20,000
(b)
Related
Billings
$200,000
110,000
35,000
205,000
b
Costs & Recognized Profits
(Losses) in Excess of Billings
$ 28,000
$67,800 + $2,200
Billings in Excess of Costs &
Recognized Profits (Losses)
$40,000
78,000
23,000
$129,000
c
$118,000 – $5,000
$40,000
d
$190,000 + $38,000
Partial Income Statement
Revenue from long-term contracts .........................................................................................
Construction expenses ($252,500** + $67,800 + $186,000 + $120,122*** + $190,000)
Gross profit .............................................................................................................................
*A:
B:
C:
D:
E:
**
***
$300,000 X ($248,000 / $320,000)
$350,000 X 20%
$280,000 X 100%
$200,000 X ($118,000 / $205,000)
$240,000 X 95%
Total revenue recognized
=
=
=
=
=
$232,500
70,000
280,000
115,122
228,000
$925,622
expense (JE ―plug‖) = $232,500 revenue + $20,000 loss recognized = $252,500
expense (JE ―plug‖) = $115,122 revenue + $5,000 loss recognized = $120,122
$925,622*
816,422
$109,200
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PROBLEM 18-17 continued (a., b., and c. only)
Partial Balance Sheet
Current assets:
Accounts receivable ($830,000 – $765,000) ........................
Inventories:
Construction in process ...........................................................
Less: Billings ..........................................................................
Costs and recognized profits (losses) in excess of billings .....
$ 65,000
$569,000 *
(440,000) **
129,000
Current liabilities:
Billings ($110,000) in excess of costs and recognized profit ($70,000) (project B)
$ 40,000
* project A $228,000 + project D $113,000 + project E $228,000
** project A $200,000 + project D $35,000 + project E $205,000
(c) Schedule to compute gross profit (loss)—include profit only for completed project; include loss for projects
with overall loss
A
B
C
D
E
Gross profit (loss) recognized
$(20,000)
$ 0
$94,000
$(5,000)
$0
Schedule to Compute ―Costs and Recognized Losses in Excess of Billings‖ or ―Billings in Excess of Costs‖
(note that CIP & Billings accounts are closed out for Project C since complete)
Costs & Recognized
Losses
a
$228,000
b
67,800
c
113,000
d
190,000
A
B
D
E
Related
Billings
$200,000
110,000
35,000
205,000
Costs & Recognized
(Losses) in Excess of Billings
$ 28,000
Billings in Excess of Costs
$42,200
78,000
15,000
$57,200
$106,000
a
$248,000 – $20,000
b
$67,800
c
$118,000 – $5,000
d
$190,000