Exercise 5-2

2006
To record installment sales
Installment receivables ................................................... 360,000
Inventory .....................................................................
234,000
Deferred gross profit ...................................................
126,000
2006
To record cash collections from installment sales
Cash ................................................................................ 150,000
Installment receivables ...............................................
150,000
2006
To recognize gross profit from installment sales
Deferred gross profit ....................................................... 52,500
Realized gross profit ...................................................
52,500

2007
To record installment sales
Installment receivables ................................................... 350,000
Inventory .....................................................................
245,000
Deferred gross profit ...................................................
105,000
2007
To record cash collections from installment sales
Cash ................................................................................ 220,000
Installment receivables ...............................................
220,000
2007
To recognize gross profit from installment sales
Deferred gross profit ....................................................... 71,000
Realized gross profit ...................................................
71,000

Exercise 5-7
Requirement 1
Contract price
Actual costs to date
Estimated costs to complete

2006
$2,000,000
300,000
1,200,000

2007
$2,000,000
1,875,000
-0-

Total estimated costs

Gross profit (estimated in 2006)

1,500,000
$ 500,000

1,875,000
$ 125,000

Gross profit recognition:

2006: $ 300,000
= 20% x $500,000 = $100,000
$1,500,000
2007:

$125,000 - $100,000 = $25,000

Requirement 2
2006
2007

$ -0$125,000

Requirement 3
Balance Sheet
At December 31, 2006
Current assets:
Accounts receivable
Costs and profit ($400,000*) in excess
of billings ($380,000)
* Costs ($300,000) + profit ($100,000)

$ 130,000
20,000

Exercise 5-7 (concluded)

Requirement 4
Balance Sheet
At December 31, 2006
Current assets:
Accounts receivable

$ 130,000

Current liabilities:
Billings ($380,000) in excess of costs ($300,000)

$ 80,000

Problem 5-2
Requirement 1
2006 Cost recovery % :
$180,000
= 60% (gross profit % = 40%)
$300,000
2007 Cost recovery %:
$280,000
= 70% (gross profit % = 30%)
$400,000
2006 gross profit:
Cash collection from 2006 sales = $120,000 x 40% =

$48,000

2007 gross profit:

Cash collection from 2006 sales = $100,000 x 40% =
+ Cash collection from 2007 sales = $150,000 x 30% =
Total 2007 gross profit

$ 40,000
45,000
$85,000

Requirement 2
2006
To record installment sales
Installment receivables ................................................... 300,000
Inventory .....................................................................
180,000
Deferred gross profit ...................................................
120,000
2006
To record cash collections from installment sales
Cash ................................................................................ 120,000
Installment receivables ...............................................
120,000
2006
To recognize gross profit from installment sales
Deferred gross profit ....................................................... 48,000
Realized gross profit ...................................................
48,000

Problem 5-2 (continued)

2007
To record installment sales
Installment receivables ................................................... 400,000
Inventory .....................................................................
280,000
Deferred gross profit ...................................................
120,000
2007
To record cash collections from installment sales
Cash ................................................................................ 250,000
Installment receivables ...............................................
250,000
2007
To recognize gross profit from installment sales
Deferred gross profit ....................................................... 85,000
Realized gross profit ...................................................
85,000
Requirement 3
Date

Cash Collected

Cost Recovery

Gross Profit

2006
2006 sales

$120,000

$120,000

-0-

2007
2006 sales
2007 sales
2007 totals

$100,000
150,000
$250,000

$ 60,000
150,000
$210,000

$40,000
-0$40,000

Problem 5-2 (concluded)

2006
To record installment sales
Installment receivables ................................................... 300,000
Inventory .....................................................................
180,000
Deferred gross profit ...................................................
120,000
2006
To record cash collection from installment sales
Cash ................................................................................ 120,000
Installment receivables ...............................................
120,000
2007
To record installment sales
Installment receivables ................................................... 400,000
Inventory .....................................................................
280,000
Deferred gross profit ...................................................
120,000
2007
To record cash collection from installment sales
Cash ................................................................................ 250,000
Installment receivables ...............................................
250,000
2007
To recognize gross profit from installment sales
Deferred gross profit ....................................................... 40,000
Realized gross profit ...................................................
40,000

Problem 5-3
Requirement 1
Total profit = $500,000 - 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 $500,000 = 40%
8/31/06

8/31/07

8/31/08

8/31/09

8/31/10

Cash collections

$100,000 $100,000 $100,000 $100,000 $100,000

a. Point of delivery method

$200,000

-0-

-0-

-0-

-0-

$ 40,000

$ 40,000

$ 40,000

$ 40,000

$40,000

-0-

-0-

b. Installment sales method

(40% x cash collected)

c. Cost recovery method

- 0 - $100,000 $100,000

Problem 5-3 (continued)

Requirement 2

Installment receivable
Sales revenue
Cost of goods sold
Inventory
To record sale on 8/31/06.

Point of
Delivery
500,000
500,000
300,000
300,000

Installment receivable
Inventory
Deferred gross profit
To record sale on 8/31/06.
Cash
Installment receivable
Entry made each Aug. 31.
Deferred gross profit
Realized gross profit
To record gross profit.

Installment
Sales

500,000

Cost Recovery

500,000
300,000
200,000

100,000

100,000
100,000

300,000
200,000

100,000
100,000

100,000

40,000
40,000

(entry made each Aug. 31)

Deferred gross profit

Realized gross profit
To record gross profit.
(entry made 8/31/09 & 8/31/10)

100,000
100,000

Problem 5-3 (concluded)

Requirement 3
Point of
Delivery

Installment
Sales

Cost
Recovery

December 31, 2006

Assets
Installment receivables
Less: Deferred gross profit
Installment receivables, net

400,000

400,000
(160,000)
240,000

400,000
(200,000)
200,000

December 31, 2007

Assets
Installment receivables
Less: Deferred gross profit
Installment receivables, net

300,000

300,000
(120,000)
180,000

300,000
(200,000)
100,000

Problem 5-4
Requirement 1
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Estimated gross profit (loss)
(actual in 2008)

2006
$10,000,000
2,400,000
5,600,000
8,000,000

2007
$10,000,000
6,000,000
2,000,000
8,000,000

2008
$10,000,000
8,200,000
-08,200,000

$ 2,000,000

$ 2,000,000

$ 1,800,000

Gross profit (loss) recognition:

2006: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2007: $6,000,000
= 75.0% x $2,000,000 = $1,500,000 - 600,000 = $900,000
$8,000,000
2008: $1,800,000 - 1,500,000 = $300,000
Requirement 2
2006

2007

2008

Construction in progress
Various accounts
To record construction costs.

2,400,000
3,600,000
2,200,000
2,400,000
3,600,000
2,200,000

Accounts receivable
Billings on construction contract
To record progress billings.

2,000,000
4,000,000
4,000,000
2,000,000
4,000,000
4,000,000

Cash
Accounts receivable
To record cash collections.

1,800,000
3,600,000
4,600,000
1,800,000
3,600,000
4,600,000

Construction in progress (gross profit)

600,000
900,000
300,000
Cost of construction (cost incurred)
2,400,000
3,600,000
2,200,000
Revenue from long-term contracts (1)
3,000,000
4,500,000
2,500,000
To record gross profit.

Problem 5-4 (continued)

(1) Revenue recognized:
2006: 30% x $10,000,000 =
2007: 75% x $10,000,000 =
Less: Revenue recognized in 2006
Revenue recognized in 2007
2008: 100% x $10,000,000 =
Less: Revenue recognized in 2006 & 2007
Revenue recognized in 2008

$3,000,000
$7,500,000
(3,000,000)
$4,500,000
$10,000,000
(7,500,000)
$2,500,000

Requirement 3
Balance Sheet
Current assets:
Accounts receivable
Construction in progress
Less: Billings
Costs and profit in excess
of billings

2006

2007

$ 200,000
$3,000,000
(2,000,000)

$600,000
$7,500,000
(6,000,000)

1,000,000

1,500,000

Requirement 4
Costs incurred during the year
Estimated costs to complete
as of year-end
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Estimated gross profit
(actual in 2008)

2006
$2,400,000

2007
$3,800,000

2008
$3,200,000

5,600,000

3,100,000

2006
$10,000,000
2,400,000
5,600,000
8,000,000

2007
$10,000,000
6,200,000
3,100,000
9,300,000

2008
$10,000,000
9,400,000
-09,400,000

$ 2,000,000

$ 700,000

$ 600,000

Problem 5-4 (concluded)

Gross profit (loss) recognition:
2006: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2007: $6,200,000
= 66.6667% x $700,000 = $466,667 - 600,000 = $(133,333)
$9,300,000
2008:

$600,000 - 466,667 = $133,333

Requirement 5
Costs incurred during the year
Estimated costs to complete
as of year-end
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Estimated gross profit (loss)
(actual in 2008)

2006
$2,400,000

2007
$3,800,000

5,600,000

4,100,000

2006
$10,000,000
2,400,000
5,600,000
8,000,000

2007
$10,000,000
6,200,000
4,100,000
10,300,000

$ 2,000,000

$ (300,000)

Gross profit (loss) recognition:

2006:

$2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000

2007:

$(300,000) - 600,000 = $(900,000)

2008:

$(100,000) - (300,000) = $200,000

2008
$3,900,000
2008
$10,000,000
10,100,000
-010,100,000
$ (100,000)

Problem 5-7
Requirement 1
a.
January 30, 2006

Cash ............................................................................... 200,000

Note receivable .............................................................. 1,000,000
Unearned franchise fee revenue .................................
1,200,000

b.

September 1, 2006

Unearned franchise fee revenue ..................................... 1,200,000

Franchise fee revenue ................................................
1,200,000

c.

September 30, 2006

Accounts receivable ($40,000 x 3%) ................................

Service revenue ..........................................................

d.

1,200
1,200

January 30, 2007

Cash ................................................................................
Note receivable ..........................................................

100,000
100,000

Problem 5-7 (concluded)

Requirement 2
a.
January 30, 2006

Cash ............................................................................... 200,000

Note receivable .............................................................. 1,000,000
Deferred franchise fee revenue ...................................
1,200,000

b.

September 1, 2006

Deferred franchise fee revenue ......................................

Franchise fee revenue (cash collected)...........................

c.

200,000

September 30, 2006

Accounts receivable ($40,000 x 3%) ................................

Service revenue ..........................................................

d.

200,000

1,200
1,200

January 30, 2007

Cash ................................................................................
Note receivable ..........................................................

100,000

Deferred franchise fee revenue ......................................

Franchise fee revenue ................................................

100,000

100,000

100,000