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Chapter 18: Question 31E-a (page 1040)

(Contract Costs) Rex鈥檚 Reclaimers entered into a contract with Dan鈥檚 Demolition to manage the processing of recycled materials on Dan鈥檚 various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex鈥檚 incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex鈥檚 also designs and builds receptacles and loading equipment that interfaces with Dan鈥檚 demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex鈥檚 and can be used for other projects. Dan鈥檚 promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex鈥檚 incurs the following costs: design services for the receptacles to interface with Dan鈥檚 equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan鈥檚 projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex鈥檚 Reclaimers revenue arrangement with Dan鈥檚 Demolition.

Short Answer

Expert verified

The total capital cost is $38,000.

Step by step solution

01

Capital Cost

Capital costs are expenses that give a benefit to a company over a longer period of time and are thus added to assets and depreciated in accounting.

02

Cost that should be capitalized

Rex must capitalize all expenditures associated with building the receptacles and preparing them for their intended usage. However, he is unable to capitalize on selling expenditures such as the commission paid to secure the contract.

The entire cost that has to be capitalized is:

Totalcapitalcost=Constructionofthereceptacles+Designservices+Loaningequipmentcontrollers+SpecialtestingandOSHAinspectionfees=$27,000+$3,000+$6,000+$2,000=$38,000

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Most popular questions from this chapter

Manual Company sells goods to Nolan Company during 2017. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?

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Instructions

(a) Determine the transaction price of the arrangement for Blair Biotech.

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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.

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Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form.
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