On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred, with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000. In 2019, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2019 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2020 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time. Required: 1. Calculate the amount of gross profit or loss to be recognized in each of the three years. 2. Prepare journal entries for 2018 and 2019 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, 2018 and 2019. Indicate whether any of the amounts shown are contract assets or contract liabilities.
> On January 1, 2018, the Montgomery Company agreed to purchase a building by making six payments. The first three are to be $25,000 each, and will be paid on December 31, 2018, 2019, and 2020. The last three are to be $40,000 each and will be paid on Dece
> Lowlife Company defaulted on a $250,000 loan that was due on December 31, 2018. The bank has agreed to allow Lowlife to repay the $250,000 by making a series of equal annual payments beginning on December 31, 2019. Required: 1. Calculate the required an
> The following situations should be considered independently. 1. John Jamison wants to accumulate $60,000 for a down payment on a small business. He will invest $30,000 today in a bank account paying 8% interest compounded annually. Approximately how long
> John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $70,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an est
> John Wiggins is considering the purchase of a small restaurant. The purchase price listed by the seller is $800,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restauran
> Harding Company is in the process of purchasing several large pieces of equipment from Danning Machine Corporation. Several financing alternatives have been offered by Danning: 1. Pay $1,000,000 in cash immediately. 2. Pay $420,000 immediately and the re
> Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. 1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $10,000 o
> Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $48,000. I
> On the last day of its fiscal year ending December 31, 2018, the Sedgwick & Reams (S&R) Glass Company completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. S&R issued 8% stated r
> Three employees of the Horizon Distributing Company will receive annual pension payments from the company when they retire. The employees will receive their annual payments for as long as they live. Life expectancy for each employee is 15 years beyond re
> John has an investment opportunity that promises to pay him $16,000 in four years. He could earn a 6% annual return investing his money elsewhere. What is the maximum amount he would be willing to invest in this opportunity?
> Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 10 years and then sold for $10,000 at the end of its useful life. Lollie h
> Wiseman Video plans to make four annual deposits of $2,000 each to a special building fund. The fund’s assets will be invested in mortgage instruments expected to pay interest at 12% on the fund’s balance. Using the appropriate annuity table, determine h
> For each of the following situations involving single amounts, solve for the unknown (?). Assume that interest is compounded annually. (i = interest rate, and n = number of years) Present Value Future Value i n 1. $ 40,000 10% 5 2. $36,289 65,000 ?
> The Field Detergent Company sold merchandise to the Abel Company on June 30, 2018. Payment was made in the form of a noninterest-bearing note requiring Abel to pay $85,000 on June 30, 2020. Assume that a 10% interest rate properly reflects the time value
> Determine the combined present value as of December 31, 2018, of the following four payments to be received at the end of each of the designated years, assuming an annual interest rate of 8%. Payment _______Year Received $5,000 ……………………………. 2019 6,000 ……
> Determine the present value of the following single amounts: Future Amount Interest Rate No. of Periods 1. $20,000 7% 10 2. 14,000 8 12 3. 25,000 12 20 4. 40,000 10 8
> Determine the future value of $10,000 under each of the following sets of assumptions: Annual Rate Period Invested Interest Compounded 1. 10% 10 years Semiannually 5 years 2. 12 Quarterly 3. 24 30 months Monthly
> Determine the future value of the following single amounts: Invested Amount Interest Rate No. of Periods 1. $15,000 6% 12 2. 20,000 8 10 3. 30,000 12 20 4. 50,000 4 12
> On September 30, 2018, the San Fillipo Corporation issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2038 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on
> On April 1, 2018, John Vaughn purchased appliances from the Acme Appliance Company for $1,200. In order to increase sales, Acme allows customers to pay in installments and will defer any payments for six months. John will make 18 equal monthly payments,
> Refer to the situation described in BE 6–2. Assume that the trip will cost $26,600. What interest rate, compounded annually, must Bill earn to accumulate enough to pay for the trip? In BE 6–2 Bill O’Brien would like to take his wife, Mary, on a trip thr
> Sandy Kupchack just graduated from State University with a bachelor’s degree in history. During her four years at the university, Sandy accumulated $12,000 in student loans. She asks for your help in determining the amount of the quarterly loan payment.
> Lang Warehouses borrowed $100,000 from a bank and signed a note requiring 20 annual payments of $13,388 beginning one year from the date of the agreement. Required: Determine the interest rate implicit in this agreement.
> Don James purchased a new automobile for $20,000. Don made a cash down payment of $5,000 and agreed to pay the remaining balance in 30 monthly installments, beginning one month from the date of purchase. Financing is available at a 24% annual interest ra
> Lincoln Company purchased merchandise from Grandville Corp. on September 30, 2018. Payment was made in the form of a noninterest-bearing note requiring Lincoln to make six annual payments of $5,000 on each September 30, beginning on September 30, 2021.
> Answer each of the following independent questions. 1. Alex Meir recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000 begin
> John Rider wants to accumulate $100,000 to be used for his daughter’s college education. He would like to have the amount available on December 31, 2023. Assume that the funds will accumulate in a certificate of deposit paying 8% interest compounded annu
> For each of the following situations involving annuities, solve for the unknown (?). Assume that interest is compounded annually and that all annuity amounts are received at the end of each period. (i = interest rate, and n = number of years) Presen
> Using the appropriate present value table and assuming a 12% annual interest rate, determine the present value on December 31, 2018, of a five-period annual annuity of $5,000 under each of the following situations: 1. The first payment is received on Dec
> Listed below are several terms and phrases associated with concepts discussed in the chapter. Pair each item fromList A with the item from List B (by letter) that is most appropriately associated with it. List B List A 1. Interest a. First cash flow
> On March 31, 2018, Southwest Gas leased equipment from a supplier and agreed to pay $200,000 annually for 20 years beginning March 31, 2019. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the pr
> Bill O’Brien would like to take his wife, Mary, on a trip three years from now to Europe to celebrate their 40th anniversary. He has just received a $20,000 inheritance from an uncle and intends to invest it for the trip. Bill estimates the trip will cos
> On June 30, 2018, Fly-By-Night Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require Fly-By-Night to make 20 annual payments of $400,000 on each June 30. Generally accepted accounting principles require this lease to be reco
> On June 30, 2018, Singleton Computers issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on June 30, 2033 (15 years). The market rate of interest for similar bond issues was 5% (2.5% semiannual rate). Interest is paid semian
> On September 30, 2018, Ferguson Imports leased a warehouse. Terms of the lease require Ferguson to make 10 annual lease payments of $55,000 with the first payment due immediately. Accounting standards require the company to record a lease liability when
> Refer to the situation described in BE 6–8. What amount did Canliss borrow assuming that the first of the five annual $10,000 payments was not due for three years? In BE 6–8 Canliss Mining Company borrowed money from a local bank. The note the company s
> Explain how the time value of money concept is incorporated into the valuation of certain leases.
> Compute the required annual payment in Question 6–13. In Question 6–13 Assume that you borrowed $500 from a friend and promised to repay the loan in five equal annual installments beginning one year from today. Your friend wants to be reimbursed for the
> Assume that you borrowed $500 from a friend and promised to repay the loan in five equal annual installments beginning one year from today. Your friend wants to be reimbursed for the time value of money at an 8% annual rate. Explain how you would compute
> On December 31, 2018, Interlink Communications issued 6% stated rate bonds with a face amount of $100 million. The bonds mature on December 31, 2048. Interest is payable annually on each December 31, beginning in 2019. Determine the price of the bonds on
> Kingsley Toyota borrowed $100,000 from a local bank. The loan requires Kingsley to pay 10 equal annual installments beginning one year from today. Assuming an interest rate of 8%, what is the amount of each annual installment payment?
> Prepare a time diagram for the present value of a four-year ordinary annuity of $200. Assume an interest rate of 10% per year.
> Fran Smith has two investment opportunities. The interest rate for both investments is 8%. Interest on the first investment will compound annually while interest on the second will compound quarterly. Which investment opportunity should Fran choose? Why?
> On July 1, 2018, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2019. Each installment also wi
> Charter Corporation, which began business in 2018, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2018 and 2019: Required: Prepare summary journal entries for 2
> Charter Corporation, which began business in 2018, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2018 and 2019: Required: 1. How much gross profit should
> In 2018, Long Construction Corporation began construction work under a three-year contract. The contract price is $1,600,000. Long recognizes revenue over time according to percentage of completion for financial reporting purposes. The financial statemen
> Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2018 and was completed in 2020. The following is a series of independent situations, numbered 1 through 6, involving differing costs for
> On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of
> On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs inc
> Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2018 and was completed in 2019. Data relating to the contract are summarized below: Required: 1. Compute the amount of revenue and
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What disclosures are required with respect to performance obligations that
> Assume McDonald’s enters into a contract to sell Billy Bear dolls for Toys4U Stores. Based on the contract, McDonald’s displays the dolls in selected stores. Toys4U is not paid until the dolls have been sold by McDonald’s, and unsold dolls are returned t
> Monitor Muffler sells franchise arrangements throughout the United States and Canada. Under a franchise agreement, Monitor receives $600,000 in exchange for satisfying the following separate performance obligations: (1) Franchisees have a five-year right
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What alternative approaches can be used to estimate variable consideration
> Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home
> Furtastic manufactures imitation fur garments. On June 1, 2018, Furtastic made a sale to Willett’s Department Store under terms that require Willett to pay $150,000 to Furtastic on June 30, 2018. In a separate transaction on June 15, 2018, Furtastic purc
> Saar Associates sells two licenses to Kim & Company on September 1, 2018. First, in exchange for $100,000, Saar provides Kim with a copy of its proprietary investment management software, which Saar does not anticipate updating and which Kim can use perm
> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club-fitting services. A full set of clubs with the fitting services sells for $1,500. O’Hara sells the same clubs without the fitting service for $1,400
> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club fitting services. A full set of clubs with the fitting services sells for $1,500. O’Hara estimates that it incurs $60 of staff compensation and othe
> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club-fitting services. A full set of clubs with the fitting services sells for $1,500. Similar club-fitting services are offered by other vendors for $11
> Lewis Co. sold merchandise to AdCo for $60,000 and received $60,000 for that sale one month later. One week prior to receiving payment from AdCo, Lewis made a $10,000 payment to AdCo for advertising services that have a fair value of $7,500. After accoun
> Assume that Amazon.com sells the MacBook Pro, a computer produced by Apple, for a retail price of $1,500. Amazon arranges its operations such that customers receive products directly from Apple Stores rather than Amazon. Customers purchase from Amazon us
> An article published in Accounting Horizons describes various techniques that companies use to manage their earnings. Required: In your library, on the Internet, or from some other source, locate the article “How Are Earnings Managed? Evidence from Audi
> Finerly Corporation sells cosmetics through a network of independent distributors. Finerly shipped cosmetics to its distributors and is considering whether it should record $300,000 of revenue upon shipment of a new line of cosmetics. Finerly expects the
> In January 2018, Continental Fund Services, Inc., enters into a one-year contract with a client to provide investment advisory services. The company will receive a management fee, prepaid at the beginning of the contract, that is calculated as 1% of the
> Leo Consulting enters into a contract with Highgate University to restructure Highgate’s processes for purchasing goods from suppliers. The contract states that Leo will earn a fixed fee of $25,000 and earn an additional $10,000 if Highgate achieves $100
> Aria Perfume, Inc., sold 3,210 boxes of white musk soap during January of 2018 at the price of $90 per box. The company offers a full refund to unsatisfied customers for any product returned within 30 days from the date of purchase. Based on historical e
> On January 1, 2018, Lego Construction Company signed a contract to build a custom garage for a customer and received $10,000 in advance for the job. The new garage will be built on the customer’s land. To complete this project, Lego must first build a co
> Precision Equipment, Inc., specializes in designing and installing customized manufacturing equipment. On February 1, 2018, it signs a contract to design a fully automated wristwatch assembly line for $2 million, which will be settled in cash upon comple
> McAfee sells a subscription to its antivirus software along with a subscription renewal option that allows renewal at half the prevailing price for a new subscription. How many performance obligations exist in this contract?
> Assume the same facts as in BE 5–8 but that customers pay 20% less for the extended warranty if they buy it at the same time they buy a Tornado. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? In BE 5
> Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or mai
> eLean is an online fitness community, offering access to workout routines, nutrition advice, and eLean coaches. Customers pay a $50 fee to become registered on the website, and then pay $5 per month for access to all eLean services. How many performance
> EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange C
> Tulane Tires wrote a contract for a $100,000 sale to the new Garden District Tour Company. Tulane only anticipates a slightly greater than fifty percent chance that Garden will be able to pay the amounts that Tulane is entitled to receive under the contr
> Sarjit Systems sold software to a customer for $80,000. As part of the contract, Sarjit promises to provide “free” technical support over the next six months. Sarjit sells the same software without technical support for $70,000 and a stand-alone six-mont
> On May 1, 2018,Varga Tech Services signed a $6,000 consulting contract with Shaffer Holdings. The contract requires Varga to provide computer technology support services whenever requested over the period from May 1, 2018, to April 30, 2019, with Shaffer
> Estate Construction is constructing a building for CyberB, an online retailing company. Under the construction agreement, if for any reason Estate can’t complete construction, CyberB would own the partially completed building and could hire another const
> On July 1, 2018, Apache Company, a real estate developer, sold a parcel of land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual pay
> Refer to the situation described in BE 5–35. What should be the balance in the deferred gross profit account at the end of 2019 applying the installment sales method? In BE 5–35 On July 1, 2018, Apache Company sold a parcel of undeveloped land to a cons
> On July 1, 2018, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,
> Refer to the situation described in BE 5–31. Assume that the building was completed during the second year, and construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in t
> Holt Industries received a $2,000 prepayment from the Ramirez Company for the sale of new office furniture. Holt will bill Ramirez an additional $3,000 upon delivery of the furniture to Ramirez. Upon receipt of the $2,000 prepayment, how much should Holt
> TopChop sells hairstyling franchises. TopChop receives $50,000 from a new franchisee for providing initial training, equipment and furnishings that have a stand-alone selling price of $50,000. TopChop also receives $30,000 per year for use of the TopChop
> ThyssenKrupp AG, headquartered in Germany, is one of the world’s largest technology companies, with almost 160,000 employees worldwide and primary segments in steel, technology, and capital goods and services. Required: 1. Access ThyssenKrupp’s most rec
> Collins, Inc., entered into a 10-year franchise agreement with an individual. For an initial franchise fee of $40,000, Collins agrees to assist in design and construction of the franchise location and in all other necessary start-up activities. Also, in
> Refer to the situation described in BE 5–39. How would your answer change if Orange reported under IFRS? In BE 5–39 Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial program along with a one-year sub
> Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial program along with a one-year subscription to the online LearnIt Office Hours virtual classroom. LearnIt-Plus retails for $200. When sold separately,
> A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The building
> Refer to the situation described in BE 5–35. How much gross profit will Apache recognize in both 2018 and 2019 applying the cost recovery method? In BE 5–35 On July 1, 2018, Apache Company sold a parcel of undeveloped land to a construction company for
> Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an initial franchise fee.
> Briefly describe how IFRS guidelines for recognizing revenue from multiple-deliverable arrangements differ from U.S. GAAP guidelines.
> Briefly describe the guidelines for recognizing revenue from the sale of software and other multiple deliverable arrangements.
> When percentage-of-completion accounting is not appropriate, U.S. GAAP requires the use of the completed contract method, while IFRS requires the use of the cost recovery method. Explain how the two methods affect recognition of revenue, cost of construc
> Refer to the situation described in BE 5–31. Assume that, during the first year the company billed its customer $7 million, of which $5 million was collected before year-end. What would appear in the year-end balance sheet related to this contract? In B
> Vodafone Group, Plc, headquartered in the United Kingdom, is one of the world’s largest telecommunications companies. Excerpts from the revenue recognition disclosure included in its 2015 annual report are reproduced below. Note A1: Significant accountin
> A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The company
> As of December 31, 2018, Cady Construction has one construction job for which the construction in progress (CIP) account has a balance of $20,000 and the billings on construction contract account has a balance of $14,000. Cady has another construction jo
