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Chapter 18: Q36E_b (page 1041)

(Recognition of Revenue on Long-Term Contract and Entries) Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2017, Hamilton began work under contract #E2-D2, which provided for a contract price of \(2,200,000. Other details follow:

2017 2018

Costs incurred during the year \)640,000 $1,425,000

Estimated costs to complete, as of December 31 960,000 鈥�0鈥�

Billings during the year 420,000 1,680,000

Collections during the year 350,000 1,500,000

Instructions

(a) What portion of the total contract price would be recognized as revenue in 2017? In 2018?

(b) Assuming the same facts as those above except that Hamilton uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2018?

(c) Prepare a complete set of journal entries for 2017 (using the percentage-of-completion method).

Short Answer

Expert verified

In 2018, the entire contract amount of $2,200,00 is recorded as revenue.

Step by step solution

01

Completed-Contract Method

It's a method of accounting that allows businesses to defer income and cost reporting until the end of a contract.

02

Revenue recognized in 2018 by the completed-contract method

The whole contract value of $2,200,00 is reported as revenue in 2018 as the amount is earned in 2018, and according to accounting principles, the revenue should be recognized in the year in which it is earned.

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Most popular questions from this chapter

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.

Instructions

(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.

(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(b) Prepare all necessary journal entries for 2018.

Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, non-refundable fee of \(300 and a usage fee of \)5 per month. Students may renew the service for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?

Explain the current environment regarding revenue recognition.
See all solutions

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