P18-6 (Long-Term Contract with Interim Loss) On March 1, 2010, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2012. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2010, 2011, and 2012 are given below. 2010 2011 2012 Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000 Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0– Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000 Instructions (a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.) (b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore incomes taxes.)
(a)Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2010
Costs to date (12/31/10)...... $2,880,000
Estimated costs to complete...... 3,520,000
Estimated total costs...... $6,400,000
Percent complete ($2,880,000 ÷ $6,400,000)...... 45%
Revenue recognized ($8,400,000 X 45%)...... $3,780,000
Costs incurred...... 2,880,000
Profit recognized in 2010...... $ 900,000
2011
Costs to date (12/31/11)
($2,880,000 + $2,230,000)...... $5,110,000
Estimated costs to complete...... 2,190,000
Estimated total costs...... $7,300,000
Percent complete ($5,110,000 ÷ $7,300,000)...... 70%
Revenue recognized in 2011. ($8,400,000 X 70%) – $3,780,000 $2,100,000 Costs incurred in 2011 2,230,000
Loss recognized in 2011...... $ (130,000)
2012
Total revenue recognized...... $8,400,000
Total costs incurred...... 7,300,000
Total profit on contract...... 1,100,000
Deduct profit previously recognized
($900,000 – $130,000)...... 770,000
Profit recognized in 2012...... $ 330,000*
*Alternative
Revenue recognized in 2012
($8,400,000 X 30%)...... $2,520,000
Costs incurred in 2012...... 2,190,000
Profit recognized in 2012...... $ 330,000
(b)Computation of Recognizable Profit/Loss
Completed-Contract Method
2010—NONE
2011—NONE
2012
Total revenue recognized...... $8,400,000
Total costs incurred...... 7,300,000
Profit recognized in 2012...... $1,100,000
Question #2 Lazaro, Inc. sells goods on the installment basis and uses the installment-sales method. Due to a customer default, Lazaro repossessed merchandise that was originally sold for $800, resulting in a gross profit rate of 40%. At the time of repossession, the uncollected balance is $520, and the fair value of the repossessed merchandise is $275. Prepare Lazaro's entry to record the repossession. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.) Debit Credit Repossessed Merchandise ? Deferred Gross Profit ? Loss on repossession ? Installment accounts receivable ?
Repossessed Merchandise...... 275
Loss on Repossession...... 37*
Deferred Gross Profit ($520 X 40%)...... 208
Installment Accounts Receivable...... 520
*[$275 – ($520 – $208)]
Question # 3 Jansen Corporation shipped $20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of $2,000. Gooch Company paid $500 for local advertising which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen's entry when the cash is received. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.) Debit Credit Cash ? commission expense ? advertising expense ? revenue from consignment sales ? Cost of goods sold ? Inventory on consignment ?
Cash...... 18,850*
Advertising Expense...... 500
Commission Expense...... 2,150
Revenue from Consignment Sales...... 21,500
*[$21,500 – $500 – ($21,500 X 10%)]
Cost of Goods Sold...... 13,200
Inventory on Consignment...... 13,200
[60% X ($20,000 + $2,000)]