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Chapter 18: Question 10Q (page 1031)
When must multiple performance obligations in a revenue arrangement be accounted for separately?
To assess whether a firm must account for various performance obligations, the company's promise to sell the consumer an item or service must be distinct from other promises in the contract.
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Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.
Instructions
(a) Prepare Zagat鈥檚 journal entry necessary on March 1, 2017.
(b) Prepare Zagat鈥檚 journal entry for the repurchase of the ingots on May 1, 2017.
E18-34 (LO5) (Analysis of Percentage-of-Completion Financial Statements) In 2017, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was \(1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2017, are shown below.
Balance Sheet | ||
Accounts receivables | \)18,000 | |
Construction in process | $65,000 | |
Less: billings | (61,500) | |
Costs and recognized profit in excess of billings | 3,500 | |
Income Statement | ||
Income(before tax) on the contract recognized in 2017 | 19,500 |
Instructions
(b) What was the initial estimated total income before tax on this contract?
(Determine Transaction Price) Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2018. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2018. Under a new policy, if payment for 2019 season slips is made by December 31, 2018, a 5% discount is allowed. If payment for 2020 season slips is made by December 31, 2018, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).
On December 31, 2017, all 300 slips for the 2018 season were rented at full price. On December 31, 2018, 200 slips were reserved and paid for the 2019 boating season, and 60 slips were reserved and paid for the 2020 boating season.
Instructions
(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.
(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.
Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.
Instructions
(a) Explain this type of revenue recognition transaction.
(b) What factors should be considered in determining when to recognize revenue in this transaction?
(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.
What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?
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