CH 18

SOLUTIONSTO B EXERCISES
E18-1B (1520minutes)
(a)
Chester Books could recognize revenue at the point of sale based upon the time of
shipment because the books are sold f.o.b. shipping point. Because of the return
policy, one might arguein favor of the cash collectionbasis. Becausethe returnscan
be estimated,onecouldarguefor shippingpoint less estimatedreturns.
(b) Based on the available informationand lack of any information indicating that any of
the criteria in FASB Statement No. 48 were not met, the correct treatment is to
report revenue at the time of shipment as the gross amount less the 16% normal
return factor. This is supported by the legal test of transfer of title and the criteria in
FASB No. 48.
One could be very conservativeand use the 20%maximumreturn
allowance.
(c)
Octobersale entry:
AccountsReceivable............................................
Allowancefor Returns...................................
($6,500,000X 16%)
SalesRevenue.............................................
6,500,000
1,040,000
5,460,000
(d) Januarycollection:
Cash.....................................................5,775,000
Allowancefor Returns...........................................
SalesRevenue.............................................
AccountsReceivable.....................................
18-1
1,040,000
315,000
6,500,000
(a)
(1) 10/5
10/9
10/25
11/2
(2) 10/5
10/9
10/25
11/2
(b)
10/14
AccountsReceivableDunn& Brooks....................
Sales...........................................................
23,000
SalesReturnsand Allowances.............................
AccountsReceivableDunn&Brooks...............
2,400
Transportation-Out.............................................
Cash.........................................................
23,000
2,400
36
36
Cash.......................................................20,600
20,600
AccountsReceivableDunn& Brooks..................
Sales[$23,000 (1%X 23,000)].....................
22,770
SalesReturnsand Allowances.............................
[$2,400 (1%X $2,400)]
2,376
Transportation-Out.............................................
Cash.........................................................
Cash.......................................................20,600
AccountsReceivableDunn& Brooks..................
SalesDiscountsForfeited....................................
(1%X $20,600)
Cash.......................................................20,394
18-2
22,770
2,376
36
36
20,394
206
20,394
Cash(2008memberships)............................................
[400 X $16,000X (1.00 0.10)]
UnearnedRevenue(current).................................
5,760,000
[150 X $16,000X (1.00 .20)]
UnearnedRevenue(noncurrent)...........................
1,920,000
[150 X $16,000X (1.00 .20)]
UnearnedRevenue(noncurrent)...........................
1,920,000
18-3
5,760,000
1,920,000
1,920,000
(a)
Grossprofit recognizedin:
2007
Contractprice
Costs:
Coststo date
Estimatedcosts
to
complete
2008
$2,500,000
$ 600,000
1,400,000
2009
$2,500,000
$1,435,000
2,000,000
615,000
$2,500,000
$2,100,000
2,050,000
2,100,000
Total estimatedprofit
500,000
Percentage
completedto date
Total grossprofit
recognized
Less:Grossprofit
recognizedin
previousyears
Grossprofit
recognizedin current
year
450,000
30%*
400,000
70%**
100%
150,000
315,000
400,000
150,000
315,000
$ 150,000
$ 165,000
**$600,000 $2,000,000
**$1,435,000 $2,050,000
18-4
85,000
E18-4B (Continued)
(b) Constructionin Process................................................
($1,435,000 $600,000)
Materials,Cash,Payables,etc.............................
835,000
AccountsReceivable($500,000 $100,000).....................
Billingsand Constructionin Process......................
400,000
Cash($300,000 $100,000)............................................
AccountsReceivable............................................
200,000
ConstructionExpenses.................................................
Constructionin Process................................................
RevenuefromLong-termContracts........................
835,000
165,000
835,000
400,000
200,000
1,000,000*
*$2,500,000X (70% 30%)

(c)
Grossprofit recognizedin:
Grossprofit
2007
$ 0
2008
$ 0
*$2,500,000 $2,100,000
18-5
2009
$400,000*
(a)
Contractbillingsto date
Less:Accountsreceivable12/31/07
Portionof contractbillingscollected
$260,000
150,500
$109,500
(b) Theratio of grossprofit to revenuerecognizedin 2007:

$130,000 = 20%
$650,000
Theinitial estimatedtotal grossprofit beforetax on the contract:
$25,000,000X .20 = $5,000,000
Welton,Inc.
Computationof GrossProfit to Be
Recognizedon UncompletedContract
Year EndedDecember31, 2007
__________________________________________________________________
Total contractprice
Estimatedcontractcost at completion
($1,600,000+ $2,400,000)
Fixedfee
Total
Total estimatedcost
Grossprofit
Percentageof completion($1,600,000 $4,000,000)
Grossprofit to be recognized($750,000X 40%)
18-6
$4,000,000
750,000
4,750,000
4,000,000
750,000
40%
$ 300,000
(a)
(1)
Grossprofit recognizedin 2007:

Contractprice
Costs:
Coststo date
Estimatedadditionalcosts
Total estimatedprofit
Percentagecompletionto date
($800,000/$8,000,000)
Grossprofit recognizedin 2007
$8,500,000
$ 800,000
7,200,000
8,000,000
500,000
10%
$ 50,000
Grossprofit recognizedin 2008:

Contractprice
Costs:
Coststo date
Estimatedadditionalcosts
Total estimatedprofit (loss)
Percentageloss to recognize
Total grossloss recognized
Less: Grossprofit recognizedin 2007
Grossloss recognizedin 2008
(2)
$8,500,000
$4,050,000
4,950,000
Constructionin Process....................................
($4,050,000 $800,000)
Materials,Cash,Payables,etc....................
3,250,000
AccountsReceivable........................................
($4,000,000 $500,000)
BillingsonConstructionin Process...............
3,500,000
Cash($3,200,000 $200,000)..............................
AccountsReceivable.................................
3,000,000
ConstructionExpense.......................................
Constructionin Process............................
RevenuesfromLong-termContract...............
3,525,000**
3,250,000
3,500,000
3,000,000
*[$8,500,000X ($4,050,000 $9,000,000)] (10%X $8,500,000)

**($4,050,000 $800,000)+ [$500,000X (1 45%)]
18-7
9,000,000
(500,000)
100%
(500,000)
50,000
$ (550,000)
550,000
2,975,000*
E18-7B (Continued)
(b) Incomestatement(2008):
Losson long-termconstructioncontract
$550,000
Balancesheet(12/31/08):
Currentassets:
Receivablesconstructionin process
Currentliabilities
Billingsof $4,000,000in excessof
constructionin processof $3,550,000**
**$4,000,000 $3,200,000= $800,000
**Totalcost to date
2007Grossprofit
2008Loss
$4,050,000
50,000
(550,000)
$3,550,000
18-8
$800,000*
$450,000
(a)
2007
$980,000 X $1,500,000= $1,050,000

$1,400,000
2008 $1,500,000 (contract price) $1,050,000 (revenue recognized in 2007) =

$450,000(revenuerecognizedin 2008)
(b) All $1,500,000of the contractpriceis recognizedas revenuein 2008.
(c)
Using the percentage-of-completion method, Young Tree Construction would make

the followingentries:
Materials,Cash,Payables,etc.................................
980,000
AccountsReceivable.....................................................
Billingson Constructionin Process.........................
800,000
980,000
800,000
Cash................................................................ 250,000
AccountsReceivable.............................................
ConstructionExpenses..................................................
RevenuefromLong-termContracts
[from(a)]...........................................................
250,000
70,000*
980,000
1,050,000
*[$1,500,000 ($980,000+ $420,000)]X ($980,000 $1,400,000)

Using the completed-contract method, Young Tree would make all the same entries
exceptfor the last entry. No incomeis recognizeduntil the contractis completed.
18-9
(a)
Computationof grossprofit to be recognizedundercompleted-contractmethod:

No computation necessary. No gross profit to be recognized prior to completion of
contract.
Computation of billings on uncompleted contract in excess of related costs, under
completed-contractmethod:
Constructioncostsincurredduringthe year
Partial billingson contract(20%X $9,000,000)
$3,040,000
(1,800,000)
$1,240,000
(b) Computation of gross profit to be recognized under percentage-of-completion

method:
Total contractprice
Total estimatedcost ($3,040,000+ $4,560,000)
Estimatedtotal grossprofit fromcontract
Percentage-of-completion($3,040,000/$7,600,000)
Grossprofit to be recognizedduringthe year
($1,400,000X 40%)
$9,000,000
7,600,000
1,400,000
40%
$ 560,000
Computation of billings on uncompleted contract in excess of related costs, under

percentage-of-completionmethod:
Constructioncostsincurredduringthe year
Grossprofit to be recognizedduringthe year (above)
Total chargedto construction-in-process
Partial billingson contract(20%X $9,000,000)
18-10
$3,040,000
560,000
3,600,000
(1,800,000)
$1,800,000
E18-10B(1525minutes)
BEARINGCONSTRUCTIONCOMPANY
IncomeStatement(partial)
Year EndedDecember31, 2007
__________________________________________________________________
Revenuefromlong-termcontracts(ProjectY)
Costsof construction(ProjectY)
Grossprofit
$200,000
191,000
9,000
Provisionfor loss(ProjectZ)*
(29,000)
*Contractcoststhrough12/31/07
Estimatedcoststo complete
Total estimatedcosts
Total contractprice
Lossrecognizedin 2007
$ 79,000
310,000
389,000
360,000
$ (29,000)
BEARINGCONSTRUCTIONCOMPANY
BalanceSheet(partial)
December31, 2007
__________________________________________________________________
Currentassets:
Accountsreceivable
($490,000 $460,000)
Inventories
Constructionin process
Less: Billings
Unbilledcontractcosts(ProjectX)
$30,000
$115,000
80,000
Currentliabilities:
Billings($210,000)in excessof contract
costs($50,000)(ProjectZ)*
*Thelossof $29,000wassubtractedfromtheconstructionin processaccount.
18-11
35,000
$160,000
(a)
Computationof grossprofit recognized:

2007
$70,000X 15%*
2008
$10,500
$201,000X 15%*
$30,150
$216,000X 12%**
25,920
$56,070
$10,500
**($300,000 $255,000) $300,000

**($750,000 $660,000) $750,000
(b) InstallmentAccountsReceivable2008.....................
InstallmentSales.............................................
750,000
Cost of InstallmentSales..........................................
Inventory........................................................
660,000
750,000
660,000
Cash........................................................... 417,000
InstallmentAccountsReceivable
2007............................................................
InstallmentAccountsReceivable
2008............................................................
InstallmentSales.....................................................
Cost of InstallmentSales..................................
DeferredGrossProfit on Installment
Sales2008.................................................
Sales2007..........................................................
Sales2008.........................................................
RealizedGrossProfit on Installment
Sales...........................................................
18-12
201,000
216,000
750,000
660,000
90,000
30,150
25,920
56,070
(a)
DeferredGrossProfit2005.....................................
RealizedGrossProfit.......................................
(To recognizegrossprofit on installmentsales)
34,700*
49,400**
30,000***
114,100
*Adjustmentfor deferredgrossprofit2005:
Balancein deferredgrossprofit account
prior to adjustment
Balanceafter adjustment($85,000X 26%)
Adjustment
$56,800
22,100
$34,700
**Adjustmentfor deferredgrossprofit2006:
prior to adjustment
Adjustment
$80,200
30,800
$49,400
***Adjustmentfor deferredgrossprofit2007:
prior to adjustment
Adjustment
(b) Cashcollectedin 2007on accountsreceivableof 2005:
$34,700/26%= $133,462
Cashcollectedin 2007on accountsreceivableof 2006:
$49,400/22%= $224,545
Cashcollectedin 2007on accountsreceivableof 2007:
$30,000/25%= $120,000
18-13
$45,000
15,000
$30,000
Grossprofit ratio2007:($600,000 $480,000) $600,000= 20%
Grossprofit ratio2008:($530,000 $442,800) $530,000= 18%
(a)
Balance,December31, 2007:
DeferredGrossProfit Account2007InstallmentSales
Grossprofit on installmentsales2007
($600,000 $480,000)
Less: Grossprofit realizedin 2007($250,000X 20%)
Balanceat 12/31/07
$120,000
(50,000)
$ 70,000
Balance,December31, 2008:
Balanceat 12/31/07
Less: Grossprofit realizedin 2008on 2007sales
($285,000X 20%)
Balanceat 12/31/08
$70,000
(57,000)
$13,000
Grossprofit on installmentsales2008
($530,000 $434,600)
Less: Grossprofit realizedin 2008on 2008sales
($168,000X 18%)
Balanceat 12/31/08
(b) RepossessedMerchandise................................................
DeferredGrossProfit ($12,000X 20%).................................
Losson Repossession......................................................
InstallmentAccountsReceivable................................
(To recordthe default andthe
repossessionof the merchandise)
18-14
$95,400
(30,240)
$65,160
8,000
2,400
1,600
12,000
UPPERWORLDCORPORATION
IncomebeforeIncomeTaxeson Installment-Sale Contract
For the Year EndedDecember31, 2007
__________________________________________________________________
Sales
Cost of sales
Grossprofit
Interestrevenue(Schedule1)
Incomebeforeincometaxes
$965,000
786,000
179,000
26,634
$205,634
Schedule1
Computationof InterestRevenueon Installment-Sale Contract
Cashsellingprice
Deduct:PaymentmadeOctober1, 2007
$965,000
250,000
715,000
X 14.9%
$106,535
Interestrate
Annualinterest
InterestOctober1, 2007, to December31, 2007($106,535X 1/4)
18-15
$26,634
(a)
Realizedgrossprofit recognizedin 2007underthe installmentmethodof accountingis

$148,531.Whengrossprofitis expressedas a percentageof cost, it mustbe convertedto
percentage
of
sales
to
compute
the
realized gross profit under the installmentmethodof accounting. Thus, 2006 and 2007
grossprofitsas a percentageof salesare 15.25%and16.67%respectively.
Sale Year
2006
2007
GrossProfit Percentage
.18/(1.00+ .18) = 15.25%*
.20/(1.00+ .20) = 16.67%*
2007
Collections
$340,000
580,000
Total
2007
RealizedProfit
$ 51,850
96,686
$148,536
*Rounded
(b) Thebalanceof DeferredGrossProfitcouldbe reportedon thebalancesheetfor 2007:
(1)
as a current liability on the theory that it is related to Installment Accounts

Receivablesthat are normallytreatedas currentassets;
(2)
as a deferred credit between liabilities and stockholders equity. This treatment is

criticizedbecausethereis no obligationto outsiders;or
(3)
as an adjustment or offset to the related Installment Accounts

Receivable. This is because the deferred gross profit is a part of revenue from
installmentsales not yet realized. The related receivable will be overstated unless
the deferredgross profit is deducted. On the other hand, the amount of deferred
gross profit has no direct relationship with the estimated collectibility of the
accountsreceivable.
It is not a settled matter as to the proper classificationof deferredgross profit on the

balancesheetwhentheinstallmentmethodof accountingis usedto measureincome.
18-16
E18-15B(Continued)
(c)
Gross profit as a percent of sales in 2006 is 15.25% (as computed in

(a) above); gross profit therefore is $114,375 ($750,000 X .1525) and the cost of 2006
salesis $635,625($750,000 $114,375).
During2007, the cumulativeamountscollectedin 2006 ($340,000) and 2007 ($340,000)
exceeded the total cost of 2006 sales of $635,625. Profit of $ 44,375 is recognized in
2007 for the 2006 sales based on the excess collections ($680,000 $635,625). Also,
no profit is recognizedon 2007 sales since the collectionsof $580,000 do not exceed
the total cost of $1,124,955.
(a)
Computationof grossprofit realizedcostrecoverymethod:
Year
Cash
Received
Beginningbalance
2006
2007
2008
$100,000
200,000
300,000
OriginalCost
Recovered
Balanceof
Unrecovered
Cost
Gross
Profit
Realized
$122,000
22,000
0
0
$100,000
22,000
0
(b) Computationof grossprofit realizedinstallmentmethod:

Grossprofit rate:($600,000 $122,000) $600,000= 79.67%*
2006Grossprofit realized:
$100,000X 79.67%= $79,670

$200,000X 79.67%= $159,340
$300,000X 79.67%= $238,990*
*Rounded
18-17
$
0
178,000
300,000
Cash(Dr.)
Year
1/1/07
$ 458,576
Deferred
Interest
Revenue
(Cr.)
Installment
Accounts
Receivable
(Cr.)
2007
458,576
$132,171
2008
458,576
93,002
Installment
Unpaid
Balance
Uncovered
Cost
Realized
Gross
Profit
Realized
Interest
Revenue
$1,101,424
$921,424
775,019
462,848
409,445
4,272
$180,000
$274,304e
$180,000
$274,304
$ 326,405
365,574
2009
458,576
(225,173)*
$1,834,304
409,445
$1,101,424
$1,101,424X 12%= $132,171

$458,576 $132,171= $326,405
c
$1,101,424 $326,405= $775,019
d
$921,424 $458,576= $462,848
b
*This amount is used to transfer the Deferred Interest Revenue from 2007 ($132,171) and
2008($93,002)to RealizedInterestRevenuein 2007.
e
2007interestrevenue($409,445X 12%) Rounded$2

2005and 2006interestrevenueto be recognized
($132,171+ $93,002)
Realizedinterestrevenuein 2007
18-18
$ 49,131
225,173
$274,304
1.
RepossessedMerchandise....................................................
DeferredGrossProfit............................................................
Losson Repossession.........................................................
InstallmentAccountsReceivable....................................
475
720*
605
1,800**
**$720= 40%X $1,800

**Sellingprice
Downpayment(10%)
Installmentpayments(4 X $90)
Installmentaccountsreceivablebalance
2.
$2,400
(240)
2,160
(360)
$1,800
RepossessedMerchandise....................................................
DeferredGrossProfit............................................................
InstallmentAccountsReceivable....................................
Gainon Repossession..................................................
**($3,180 $1,500)/$3,180= 52.83%grossprofit rate;
$676= 52.83%X $1,280
**Sellingprice
Downpayment
Monthlypayments($160X 10)
Installmentaccountsreceivablebalance
18-19
$3,180
(300)
2,880
1,600
$1,280
850
676*
1,280**
246
Cash....................................................................................... 700
InstallmentAccountsReceivable..............................................
(To recordthe collectionof cashon installment
accountsreceivable)
700
DeferredGrossProfit (20%X $700)...................................................

RealizedGrossProfit..............................................................
(To recognizegrossprofit on installmentsale)
140
RepossessedMerchandise*.............................................................
DeferredGrossProfit (20%X $3,200)................................................
Losson Repossession....................................................................
InstallmentAccountsReceivable..............................................
(To recorddefault andrepossessionof
merchandise)
2,150
640
410
Losson Repossession....................................................................
Cash.....................................................................................
(To recordcashspenton reconditioningof
inventory)
110
*Fair valueis after reconditioning
18-20
140
3,200
110
InstallmentPaymentSchedule
Interestat 6%
Cost-RecoveryMethod
Cash(Debit)
Date
7/1/07
Deferred
Interest
Revenue
(Credit)
Installment
Accounts
Receivable
(Credit)
Installment
Unpaid
Balance
Uncovered
Cost
Realized
GrossProfit
Realized
Interest
Revenue
$2,500,000
$2,000,000
6/30/08
$ 935,274
$150,000
$ 785,274
1,714,726
1,064,726
6/30/09
935,274
102,884
832,390
882,336
129,452
6/30/10
935,274
( (252,884)
882,336
$2,805,822
$2,500,000
*$500,000**
$500,000
*$305,822*
$305,822
**Consistsof $252,884of deferredinterestrevenuefrom2005and 2006and$52,938of interestfor 2007.

**$2,500,000 $2,000,000= $500,000,or [$935,274 ($252,884+ $52,938+ $129,452)]= $500,000.
*E18-21B(1418minutes)
Note:For each part below,the presentvalue of the notesreceivableis $141,191,calculated
as follows:
$40,000X 3.60478(ordinaryand???payments,12%)
(a)
Cash.................................................................... 25,000
NotesReceivable.............................................................
Discounton NotesReceivable...................................
RevenuefromFranchiseFees...................................
(b) Cash.................................................................... 25,000

UnearnedFranchiseFees.........................................
(c)
Cash.................................................................... 25,000
UnearnedFranchiseFees.........................................
RevenuefromFranchiseFees...................................
(Calculationsrounded)
18-21
200,000
55,809
169,191
200,000
55,809
169,191
200,000
55,809
84,596
84,595
(a)
Downpaymentmadeon 1/1/07
Presentvalueof an ordinaryannuity($27,500X 3.169)
Total revenuerecordedby WorldPremiereand total
acquisitioncost recordedby Shaw& Shaw
(b) Cash.............................................................20,000
NotesReceivable......................................................
Discounton NotesReceivable............................
RevenuefromFranchiseFees............................
(c)
(1)
(2)
(3)
$ 20,000
87,147
$107,147
110,000
22,853
107,147
$20,000cashreceivedfromdownpayment.
$20,000cashreceivedfromdownpayment.
None.($20,000is recordedas unearnedrevenuefromfranchisefees.)
(a)
Inventoriablecosts:
500 unitsshippedat cost of $100each
Freight
Total inventoriablecost
80 units on hand(80/500X $51,250)
$50,000
1,250
$51,250
$8,200
(b) Computationof consignmentprofit:

Consignmentsales(420 X $160)
Cost of units sold (420/500X $51,250)
Commissionchargedby consignee(20%X $67,200)
Profit on consignmentsales
(c)
$67,200
(43,050)
(13,440)
$10,710
Remittanceof consignee:
Consignmentsales
Less: Commissions
Remittancefromconsignee
$67,200
13,440
$53,760
18-22

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CH 18

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SOLUTIONSTO B EXERCISES

*$2,500,000X (70% 30%)

(b) Theratio of grossprofit to revenuerecognizedin 2007:

Grossprofit recognizedin 2007:

Grossprofit recognizedin 2008:

*[$8,500,000X ($4,050,000 $9,000,000)] (10%X $8,500,000)

$980,000 X $1,500,000= $1,050,000

2008 $1,500,000 (contract price) $1,050,000 (revenue recognized in 2007) =

Using the percentage-of-completion method, Young Tree Construction would make

*[$1,500,000 ($980,000+ $420,000)]X ($980,000 $1,400,000)

Computationof grossprofit to be recognizedundercompleted-contractmethod:

(b) Computation of gross profit to be recognized under percentage-of-completion

Computation of billings on uncompleted contract in excess of related costs, under

Computationof grossprofit recognized:

**($300,000 $255,000) $300,000

Realizedgrossprofit recognizedin 2007underthe installmentmethodof accountingis

as a current liability on the theory that it is related to Installment Accounts

as a deferred credit between liabilities and stockholders equity. This treatment is

as an adjustment or offset to the related Installment Accounts

It is not a settled matter as to the proper classificationof deferredgross profit on the

Gross profit as a percent of sales in 2006 is 15.25% (as computed in

Computationof grossprofit realizedcostrecoverymethod:

(b) Computationof grossprofit realizedinstallmentmethod:

$100,000X 79.67%= $79,670

$1,101,424X 12%= $132,171

2007interestrevenue($409,445X 12%) Rounded$2

**$720= 40%X $1,800

DeferredGrossProfit (20%X $700)...................................................

*Fair valueis after reconditioning

**Consistsof $252,884of deferredinterestrevenuefrom2005and 2006and$52,938of interestfor 2007.

(b) Cash.................................................................... 25,000

(b) Computationof consignmentprofit:

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