/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} 1 FC XM, Ltd. was a small engineering... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 3: 1 FC (page 119)

XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2018. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at December 31, 2018. McLauren sold the company in January 2019 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment.

Requirements

1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?

2. What action do you think was taken by XM in 2019 with regard to the revenue that had been accrued the previous year?

Short Answer

Expert verified
  1. The percentage of completion is determined on the basis of cost, effort (resource), or units delivered. The revenue accrued under the percent of completion may become a loss if the project has not been completed successfully.
  2. XM should reverse the recognized revenue of $16,000,000.

Step by step solution

01

Percentage of completion method for complex, high-tech contracts

The percentage of completion method is a method of apportioning income and expenses based on the percent of work completed. This method is used by different construction companies and engineering firms that operate complex and long-term contracts.

Determining the percent of completion 鈥揟he percent of completion can be determined in several ways. Some of the most common practice to determine the percentage of completion are as follow 鈥�

a) Cost-to-cost method 鈥� This is the most common method of determining the percent of completion. Under this method first of all the cost of the entire project is determined first. Then the cost incurred to date is compared with the total cost. The percent of the cost incurred to date would represent the percent of completion of work. This is the simplest method to determine the percentage of completion.

b) Effort-Expanded method 鈥� This is the second most common method of determining the percentage of completion. Under this method in place of expense, the effort or resources utilized are compared with the total estimated resource or efforts to be put into the project.

For example, direct labor hours used to date in comparison to the total estimated direct labor hour for the project, etc.

c) Units-of-delivery method 鈥� This method is used by manufacturing companies. Under this method, the percentage of units delivered to the buyer out of the total number of units to be delivered is considered to be the percent of work completion.

Determination of amount of revenue to accrue 鈥�

The amount of revenue to accrue under the percent of completion method depends upon the percent of the project completed to date.

For example 鈥� if a project is estimated to generate $5m revenue and to date, only 45% of the project has been completed. So the amount of revenue to be accrued would be 45% of the total estimated revenue which is - $2.25m.

02

Action regarding accrued revenue

As the project has not been completed successfully, so the product would not be able to be sold in the market. In such a case, all the expenses incurred on the product were a loss and no revenue would be generated by the product. In such a case the ethical accounting practice is to reverse the accrued revenue by showing a revenue loss and to consider the expense incurred on the product as an experiment expense.

Thus as per this practice, XM must have shown the $16,000,000 revenue loss and reversed the accrued revenue. This is 80% of the total contract value. The XM may recover some amount from the party on the basis of recycling value or reselling value of the unsuccessful product.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

Question: Hooten Carpentry had the following accounts and account balances after adjusting entries. Assume all accounts have normal balances. Prepare the adjusted trial balance for Hooten Carpentry as of December 31, 2018. Cash \( 4,025 Common Stock \) ? Land 5,000 Accounts Receivable 660 Utilities Expense 400 Office Supplies 120 Accounts Payable 225 Utilities Payable 210 Accumulated Depreciation鈥擡quipment 1,000 Service Revenue 12,000 Salaries Expense 550 Unearned Revenue 300 Supplies Expense 80 Depreciation Expense鈥擡quipment 800 Equipment 10,000 Dividends 500.

Griffin Fishing Charters has collected the following data for the December 31 adjusting entries: a. The company received its electric bill on December 31 for \(375 but will not pay it until January 5. (Use the Utilities Payable account.) b. Griffin purchased a three-month boat insurance policy on November 1 for \)1,200. Griffin recorded a debit to Prepaid Insurance. c. As of December 31, Griffin had earned \(3,000 of charter revenue that has not been recorded or received. d. Griffin鈥檚 fishing boat was purchased on January 1 at a cost of \)33,500. Griffin expects to use the boat for 10 years and that it will have a residual value of \(3,500. Determine annual depreciation assuming the straight-line depreciation method is used. e. On October 1, Griffin received \)9,000 prepayment for a deep-sea fishing charter to take place in December. As of December 31, Griffin has completed the charter. Requirements 1. Journalize the adjusting entries needed on December 31 for Griffin Fishing Charters. Assume Griffin records adjusting entries only at the end of the year. 2. If Griffin had not recorded the adjusting entries, indicate which specific category of accounts on the financial statements would be misstated and if the misstatement is overstated or understated. Use the following table as a guide.

Question :Austin Acoustics recorded the following transactions during October: a. Received \(2,500 cash from customer for three months of service beginning October 1 and ending December 31. The company recorded a \)2,500 debit to Cash and a \(2,500 credit to Unearned Revenue. b. Employees are paid \)3,000 on Monday following the five-day workweek. October 31 is on Friday. c. The company pays \(440 on October 1 for its six-month auto insurance policy. The company recorded a \)440 debit to Prepaid Insurance and a \(440 credit to Cash. d. The company purchased office furniture for \)8,300 on January 2. The company recorded a \(8,300 debit to Office Furniture and an \)8,300 credit to Accounts Payable. Annual depreciation for the furniture is \(1,000. e. The company began October with \)50 of office supplies on hand. On October 10, the company purchased office supplies on account of \(100. The company recorded a \)100 debit to Office Supplies and a \(100 credit to Accounts Payable. The company used \)120 of office supplies during October. f. The company received its electric bill on October 31 for \(325 but did not pay it until November 10. g. The company paid November鈥檚 rent of \)2,500 on October 30. On October 30, the company recorded an \(2,500 debit to Rent Expense and a \)2,500 credit to Cash. Indicate if an adjusting entry is needed for each item on October 31 for the month of October. Assuming the adjusting entry is not made, indicate which specific category or categories of accounts on the financial statements are misstated and if they are overstated or understated. Use the following table as a guide. Item a is completed as an example:used.

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130
See all solutions

Recommended explanations on Business Studies Textbooks

Change Management

Read Explanation

Business Data Analytics

Read Explanation

Strategy

Read Explanation

Project Planning & Management

Read Explanation

Managers

Read Explanation

Sales in Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.