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Chapter 18: Question 33E-b (page 1040)

(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.

Short Answer

Expert verified

Revenue from long-term contract is $560,000.

Step by step solution

01

Meaning of Long-Term Contract

A long-term contractis when you commit to working for someone else for an extended period of time. Because the parties will never need to amend or renegotiate the contract as the future unfolds, a long-term contract is also considered complete.

02

Journal entries for 2018

Date

Particular

Debit ($)

Credit ($)

Construction in process a/c

425,000

Materials, cash, payables, etc. a/c

425,000

Accounts receivables a/c

600,000

Billing on construction in process a/c

600,000

Construction expenses a/c

425,000

Construction in process a/c

135,000

Revenue from long term contract a/c

560,000

Working Notes:

Materialcash,payablesetc=Costincurredin2018-Costincurredin2018=$825,000-$400,000=$425,000

Accountreceivables=Billingtodate2018-Billingtodatein2017=$900,000-$300,000=$600,000

Revenue=(Contractprice脳Percentageofcompletionin2018)-(Contractprice脳Percentageofcompletionin2017)=($1,600,000脳75%)-($1,600,000脳40%)=(1,200,000-$640,000)=$560,000

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Most popular questions from this chapter

P18-4 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy鈥檚 main products are as follows

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Refrigerator

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560 (275)

Stackable washer/dryer unit

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Instructions

Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co.

On June 1, 2017, Economy sold 100 washer/dryer units without installation to Laplante Rentals for \)70,000. Laplante is a newer customer and is unsure how this product will work in its older rental units. Economy offers a 60-day return privilege and estimates, based on prior experience with sales on this product, that 4% of the units will be returned. Prepare the journal entries for the sale and related cost of goods sold on June 1, 2017.

Question: (Allocate Transaction Price) Refer to the revenue arrangement in E18-13.

Instructions

Repeat requirements (a) and (b) assuming Crankshaft does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $36,000; Crankshaft prices these services with a 25% margin relative to cost.

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

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Celic Inc. manufactures and sells computers that include an assurance-type warranty for the first 90 days. Celic offers an optional extended coverage plan under which it will repair or replace any defective part for 3 years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Celic determines that the 3 years of extended coverage represents a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is \(3,600 on October 1, 2017, and Celic determines the standalone selling price of each is \)3,200 and \(400, respectively. Further, Celic estimates, based on historical experience, it will incur \)200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is \(1,440. Assume that the \)200 in costs to repair defects in the computers occurred on October 25, 2017.

Instructions

(a) Prepare the journal entry(ies) to record the October transactions related to sale of the computers.

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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.

(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.
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