Year Gross profit recognized
2013 - 0 -
2014 - 0 -
2015 $200,000
Total gross profit $200,000
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–45
Exercise 5–15 (continued)
Situation 3 - Percentage-of-Completion
2013 2014 2015
Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 1,500,000 3,600,000 5,200,000 Estimated costs to complete 3,000,000 1,500,000 -0- Total estimated costs 4,500,000 5,100,000 5,200,000 Estimated gross profit (loss)
(actual in 2015) $ 500,000 $ (100,000) $ (200,000) Gross profit (loss) recognized:
2013: $1,500,000
= 33.3333% x $500,000 = $166,667
$4,500,000
2014: $(100,000) – 166,667 = $(266,667) 2015: $(200,000) – (100,000) = $(100,000) Situation 3 - Completed Contract
Year Gross profit (loss) recognized
2013 - 0 -
2014 $(100,000)
2015 (100,000)
Total project loss $(200,000)
© The McGraw-Hill Companies, Inc., 2013
5–46 Intermediate Accounting, 7/e
Exercise 5–15 (continued)
Situation 4 - Percentage-of-Completion
2013 2014 2015
Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 4,500,000 Estimated costs to complete 3,500,000 875,000 - 0 - Total estimated costs 4,000,000 4,375,000 4,500,000 Estimated gross profit
(actual in 2015) $1,000,000 $ 625,000 $ 500,000 Gross profit (loss) recognized:
2013: $ 500,000
= 12.5% x $1,000,000 = $125,000
$4,000,000
2014: $3,500,000
= 80.0% x $625,000 = $500,000 – 125,000 = $375,000
$4,375,000
2015: $500,000 – 500,000 = $ - 0 - Situation 4 - Completed Contract
Year Gross profit recognized
2013 - 0 -
2014 - 0 -
2015 $500,000
Total gross profit $500,000
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–47
Exercise 5–15 (continued)
Situation 5 - Percentage-of-Completion
2013 2014 2015
Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 4,800,000 Estimated costs to complete 3,500,000 1,500,000 - 0 - Total estimated costs 4,000,000 5,000,000 4,800,000 Estimated gross profit
(actual in 2015) $1,000,000 $ - 0 - $ 200,000 Gross profit (loss) recognized:
2013: $ 500,000
= 12.5% x $1,000,000 = $125,000
$4,000,000
2014: $0 – 125,000 = $(125,000) 2015: $200,000 – 0 = $200,000 Situation 5 - Completed Contract
Year Gross profit recognized
2013 - 0 -
2014 - 0 -
2015 $200,000
Total gross profit $200,000
© The McGraw-Hill Companies, Inc., 2013
5–48 Intermediate Accounting, 7/e
Exercise 5–15 (concluded)
Situation 6 - Percentage-of-Completion
2013 2014 2015
Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 5,300,000 Estimated costs to complete 4,600,000 1,700,000 - 0 - Total estimated costs 5,100,000 5,200,000 5,300,000 Estimated gross profit (loss)
(actual in 2015) $ (100,000) $ (200,000) $ (300,000) Gross profit (loss) recognized:
2013: $(100,000)
2014: $(200,000) – (100,000) = $(100,000) 2015: $(300,000) – (200,000) = $(100,000) Situation 6 - Completed Contract
Year Gross profit (loss) recognized
2013 $(100,000)
2014 (100,000)
2015 (100,000)
Total project loss $(300,000)
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–49
Exercise 5–16
Requirement 1
Construction in progress = Costs incurred + Profit recognized $100,000 = ? + $20,000
Actual costs incurred in 2013 = $80,000 Requirement 2
Billings = Cash collections + Accounts receivable
$94,000 = ? + $30,000 Cash collections in 2013 = $64,000
Requirement 3
Let A = Actual cost incurred + Estimated cost to complete Actual cost incurred
x (Contract price – A) = Profit recognized A
$80,000
($1,600,000 – A) = $20,000 A
$128,000,000,000 – 80,000A = $20,000A
$100,000A = $128,000,000,000 A = $1,280,000
Estimated cost to complete = $1,280,000 – 80,000 = $1,200,000 Requirement 4
$80,000
= 6.25%
$1,280,000
© The McGraw-Hill Companies, Inc., 2013
5–50 Intermediate Accounting, 7/e
Exercise 5–17
Requirement 1
The specific citation that specifies the the circumstances and conditions under which it is appropriate to use the percentage-of-completion method is: FASB ASC 605–35–
25–57: “Revenue Recognition–Construction–Type and Production–Type Contracts–
Recognition–Circumstances Appropriate for Using the Percentage-of-Completion Method.”
Requirement 2
FASB ASC 605–35–25–57 reads as follows:
“The percentage-of-completion method is considered preferable as an accounting policy in circumstances in which reasonably dependable estimates can be made and in which all the following conditions exist:
a. Contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement.
b. The buyer can be expected to satisfy all obligations under the contract.
c. The contractor can be expected to perform all contractual obligations.”
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–51
Exercise 5–18
Requirement 1
Revenue should be recognized as follows:
Software – date of shipment, July 1, 2013
Technical support – evenly over the 12 months of the agreement Upgrade – date of shipment, January 1, 2014
The amounts are determined by an allocation of total contract price in proportion to the individual fair values of the components if sold separately:
Software $210,000 ÷ $270,000 x $243,000 = $189,000 Technical support $30,000 ÷ $270,000 x $243,000 = 27,000 Upgrade $30,000 ÷ $270,000 x $243,000 = 27,000
Total $243,000
Requirement 2
July 1, 2013
Cash ... 243,000
Revenue ... 189,000 Unearned revenue ($27,000 + 27,000) ... 54,000 To record sale of software
© The McGraw-Hill Companies, Inc., 2013
5–52 Intermediate Accounting, 7/e
Exercise 5–19
Requirement 1
Conveyer ($20,000 ÷ $50,000) x $45,000 = $18,000 Labeler ($10,000 ÷ $50,000) x $45,000 = 9,000 Filler ($15,000 ÷ $50,000) x $45,000 = 13,500 Capper ($5,000 ÷ $50,000) x $45,000 = 4,500
Total $45,000
Requirement 2
All $45,000 of revenue is delayed until installation of the conveyer, because the usefulness of the other elements of the multi-part arrangement is
contingent on its delivery.
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–53
Exercise 5–20
Requirement 1
Conveyer ($20,000 ÷ $50,000) x $45,000 = $18,000 Labeler ($10,000 ÷ $50,000) x $45,000 = 9,000 Filler ($15,000 ÷ $50,000) x $45,000 = 13,500 Capper ($5,000 ÷ $50,000) x $45,000 = 4,500
Total $45,000
Requirement 2
Under IFRS, it is likely that Richardson would recognize revenue the same as in Requirement 1, because (a) revenue for each part can be estimated reliably and (b) the receipt of economic benefits is probable.
© The McGraw-Hill Companies, Inc., 2013
5–54 Intermediate Accounting, 7/e
Exercise 5–21
October 1, 2013
Cash (10% x $300,000) ... 30,000 Note receivable ... 270,000
Unearned franchise fee revenue ... 300,000 To record franchise agreement and down payment
January 15, 2014
Unearned franchise fee revenue ... 300,000
Franchise fee revenue ... 300,000 To recognize franchise fee revenue
Exercise 5–22
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–55
Exercise 5–23
Requirement 1
Requirement 2
By itself, this one ratio provides very little information. In general, the higher the inventory turnover, the lower the investment must be for a given level of sales. It indicates how well inventory levels are managed and the quality of inventory, including the existence of obsolete or overpriced inventory.
However, to evaluate the adequacy of this ratio it should be compared with some norm such as the industry average. That indicates whether inventory management practices are in line with the competition.
It’s just one piece in the puzzle, though. Other points of reference should be considered. For instance, a high turnover can be achieved by maintaining too low inventory levels and restocking only when absolutely necessary. This can be costly in terms of stockout costs.
The ratio also can be useful when assessing the current ratio. The more liquid inventory is, the lower the norm should be against which the current ratio should be compared.
Inventory turnover ratio = Cost of goods sold
Average inventory
= $1,840,000
[$690,000 + 630,000] ÷ 2
= 2.79 times
© The McGraw-Hill Companies, Inc., 2013
5–56 Intermediate Accounting, 7/e
Exercise 5–24
Turnover ratios for Anderson Medical Supply Company for 2013:
The company turns its inventory over 6 times per year compared to the industry average of 5 times per year. The asset turnover ratio also is slightly better than the industry average (2 times per year versus 1.8 times). These ratios indicate that Anderson is able to generate more sales per dollar invested in inventory and in total assets than the industry averages. However, Anderson takes slightly longer to collect its accounts receivable (27.4 days compared to the industry average of 25 days).
Inventory turnover ratio = $4,800,000
[$900,000 + 700,000] ÷ 2
= 6 times
Receivables turnover ratio = $8,000,000
[$700,000 + 500,000] ÷ 2
= 13.33 times
Average collection period = 365
13.33
= 27.4 days
Asset turnover ratio = $8,000,000
[$4,300,000 + 3,700,000] ÷ 2
= 2 times
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–57
Exercise 5–25
Retained earnings beginning of period $100,000
Add: Net income 180,000
280,000 Less: Retained earnings end of period 150,000
Dividends paid $130,000
Profit margin x Asset turnover x Equity multiplier = ROE 3.46% x 2.89 x 3.43 = 34.3%
Exercise 5–27
Quarter
First Second Third Cumulative income before taxes $50,000 $90,000 $190,000 Estimated annual effective tax rate 34% 30% 36%
17,000 27,000 68,400
Less: Income tax reported earlier - 0 - 17,000 27,000
Tax expense to be reported $17,000 $10,000 $ 41,400
© The McGraw-Hill Companies, Inc., 2013
5–58 Intermediate Accounting, 7/e
Exercise 5–28
Incentive compensation $300 million ÷ 4 = $75 million Depreciation expense $60 million ÷ 4 = $15 million
Gain on sale $23 million
Exercise 5–29
Quarters Ending
March 31 June 30 Sept. 30 Dec. 31 Advertising $200,000 $200,000 $200,000 $200,000
Property tax 87,500 87,500 87,500 87,500
Equipment repairs 65,000 65,000 65,000 65,000
Extraordinary casualty loss - 0 - 185,000 - 0 - - 0 - Research and development - 0 - 96,000 0 0
Note: this solution assumes that advertising, property tax, and equipment repairs are viewed as benefitting all periods following the one in which the expenditure is made, but that the extraordinary casualty loss and the R&D consulting fee only benefit the periods in which they occurred.
Exercise 5–30
Quarters Ending
March 31 June 30 Sept. 30 Dec. 31
Advertising $800,000 - 0 - - 0 - - 0 -
Property tax 350,000 - 0 - - 0 - - 0 -
Equipment repairs 260,000 - 0 - - 0 - - 0 - Extraordinary casualty loss - 0 - 185,000 - 0 - - 0 - Research and development - 0 - 96,000 - 0 - - 0 -
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–59