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Chapter 18: Question BE18-22 (page 1034)

Turner, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. During 2017, Turner, Inc. incurred costs of \)1,700,000, billed its customers for \(1,200,000, and collected \)960,000. At December 31, 2017, the estimated additional costs to complete the project total $3,300,000. Prepare Turner鈥檚 2017 journal entries using the percentage-of-completion method.

Short Answer

Expert verified

Revenue generated from this contract is $2,380,000.

Step by step solution

01

Meaning of Percentage-of-Completion Method

As a corporation approaches the end of a long-term contract, the percentage-of-completion technique is used to calculate revenues, expenditures, and gross profit. Deferring recognition of these items until the contract's end distorts the effort (costs) and outcomes of the accounting periods (revenues).

02

Journal entries of Turner Inc. in 2017

Date

Particular

Debit ($)

Credit ($)

Construction in process a/c

1,700,000

To Materials, Cash, Payables a/c

1,700,000

Accounts receivables a/c

1,200,000

To Billings on construction in process a/c

1,200,000

Cash a/c

960,000

To Accounts receivables a/c

960,000

Construction in process a/c

680,000

Construction expenses a/c

1,700,000

To Revenue from contract a/c

2,380,000

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Most popular questions from this chapter

Explain the importance of a contract in the revenue recognition process.

Question: P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.

Instructions

Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer鈥檚 gas line for a total price \(800. On a standalone basis, the grill sells for \)700 (cost \(425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is \)150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2017, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2017. Prepare journal entries for Grill Master for GM205 in April and May 2017.

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

On January 1, 2017, Gordon Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for \(3,000. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Gordon identifies two performance obligations and allocates \)1,200 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is \(700; the shelves have a cost of \)320.

Instructions

Prepare the journal entry on February 25, 2017, for Gordon when the shelving unit is delivered to the customer and Gordon receives full payment.

Refer to the revenue arrangement in E18-10. Repeat the requirements, assuming (a) Geraths estimates the standalone selling price of the installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the standalone selling price of the installation. (Round amounts to nearest dollar.)
See all solutions

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