Answer Chap05

Exercise 5-1
Requirement 1
Cost of goods sold (1,000,000 - 400,000)
Add: Gross profit if use cost recovery method
Cash collected
600,000
100,000
700,000
Requirement 2
400,000
Gross profit percentage =
= 40%
1,000,000
Cash collected x Gross profit percentage = Gross profit recognized

700,000 x 40% = 280,000 gross profit
Exercise 5-2
Requirement 1
2006 Cost recovery % :
$234,000
= 60% (gross profit % = 40%)
$390,000
2007 Cost recovery %:
$247,000
= 65% (gross profit % = 35%)
$380,000
2006 gross profit:
Cash collection from 2003 sales = $150,000 x 40%
2007 gross profit:
Cash collection from 2003 sales = $100,000 x 40%
+ Cash collection from 2004 sales = $120,000 x 35%
Total 2004 gross profit
$60,000
=
=
$ 40,000
42,000
$82,000
Requirement 2
2006 deferred gross profit balance:
2003 initial gross profit ($390,000 - 234,000)
Less: Gross profit recognized in 2003
Balance in deferred gross profit account
$156,000
(60,000)
$96,000
2007 deferred gross profit balance:

Gross profit recognized in 2004
$ 156,000
(60,000)
(40,000)

Balance in deferred gross profit account
133,000
(42,000)
$147,000
Exercise 5-3
2006
To record installment sales
Installment receivables..............................390,000
................................................................Inventory
...................................................................234,000
..............................................Deferred gross profit
...................................................................156,000
2007
To record cash collections from installment sales
Cash...........................................................150,000
...........................................Installment receivables
...................................................................150,000
2006
To recognize gross profit from installment sales
Deferred gross profit...................................60,000
...............................................Realized gross profit
.....................................................................60,000
2007
Installment receivables......................................380,000
Inventory..................................................................... 247,000
Deferred gross profit................................................... 133,000
2007
To record cash collections from installment sales
Cash...................................................................220,000
Installment receivables............................................... 220,000
2007
To recognize gross profit from installment sales
Deferred gross profit............................................82,000
Realized gross profit................................................... 82,000
Exercise 5-4
Requirement 1
Year
2006
2007
2008
2009
Total
Income recognized
$174,000 ($300,000 - 126,000)
-0-0-0$174,000
Requirement 2
Year
2006
2007
2008
2009
Totals
Cash Collected
$ 75,000
75,000
75,000
75,000
$300,000
Cost Recovery(42%)
$ 31,500
31,500
31,500
31,500
$126,000
Gross Profit(58%)
$ 43,500
43,500
43,500
43,500
$174,000
Cost Recovery
$ 75,000
51,000
-0-0$126,000
Gross Profit
-0$ 24,000
75,000
75,000
$174,000
Requirement 3
Year
2006
2007
2008
2009
Totals
Cash Collected
$ 75,000
75,000
75,000
75,000
$300,000
Exercise 5-5
Requirement 1
July 1, 2006 To record installment sale
Installment receivables..................................300,000
..............................................................Sales revenue
.......................................................................300,000
Cost of goods sold.........................................126,000
....................................................................Inventory
.......................................................................126,000
To record cash collection from
installment sale
Cash.................................................................75,000
...............................................Installment receivables
.........................................................................75,000
July 1, 2007 To record cash collection from
installment sale
Cash.................................................................75,000
.........................................................................75,000
The same for July 1, 2008 & 2009
Exercise 5-5 (continued)

Requirement 2
....................................................................Inventory
.......................................................................126,000
..................................................Deferred gross profit
.......................................................................174,000
installment sale
Cash.................................................................75,000
.........................................................................75,000
.......To recognize gross profit from
installment sale
Deferred gross profit.......................................43,500
...................................................Realized gross profit
.........................................................................43,500
installment sale
Cash.................................................................75,000
.........................................................................75,000
installment sale
.........................................................................43,500
The same for July 1, 2008 & 2009
Exercise 5-5 (concluded)

Requirement 3
....................................................................Inventory
.......................................................................129,000
.......................................................................174,000
......To record cash collection from
installment sale
Cash.................................................................75,000
.........................................................................75,000
installment sale
Cash.................................................................75,000
.........................................................................75,000
installment sale
.........................................................................24,000
July 1, 2008 & 2009
installment sale
Cash.................................................................75,000
.........................................................................75,000

installment sale
.........................................................................75,000
Exercise 5-6
Requirement 1
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Gross profit (estimated in 2003)
2003
$2,000,000
300,000
1,200,000
1,500,000
$ 500,000
2004
$2,000,000
1,875,000
-01,875,000
$ 125,000
Gross profit recognition:

2006: $ 300,000
= 20% x $500,000 = $100,000
$1,500,000
2007:
$125,000 - $100,000 = $25,000
Requirement 2
2006
2007
$
-0$125,000
Requirement 3
Balance Sheet
At December 31, 2006
Current assets:
Accounts receivable (380 250)
Costs and profit ($400,000*) in excess
of billings ($380,000)
$ 130,000
20,000
* Costs ($300,000) + profit ($100,000)

Requirement 4
Balance Sheet
At December 31, 2006
Current assets:
Accounts receivable
$ 130,000
Current liabilities:
Billings ($380,000) in excess of costs ($300,000)
$ 80,000
Exercise 5-10
Requirement 1
Contract price
Estimated gross profit (loss)
(actual)
2006
$8,000,000
2,000,000
4,000,000
6,000,000
2007
$8,000,000
4,500,000
3,600,000
8,100,000
2008
$8,000,000
8,200,000
-08,200,000
$2,000,000
$ (100,000)
$ (200,000)
Gross profit (loss) recognition:

2006: $2,000,000
= 33.3333% x $2,000,000 = $666,667
$6,000,000
2007: $(100,000) - 666,667
= $(766,667)
2008: $(200,000) - (100,000) = $(100,000)
10
Exercise 5-10 (continued)

Requirement 2
Construction in progress
Various accounts
To record construction costs.
2006
2007
2,000,000
2,500,000
2,000,000
2,500,000
Accounts receivable
Billings on construction contract
To record progress billings.
2,500,000
2,750,000
2,500,000
2,750,000
Cash
Accounts receivable
To record cash collections.
2,250,000
2,475,000
2,250,000
2,475,000
(gross profit)
Cost of construction
Revenue from long-term contracts
666,667
2,000,000
(33.3333% x $8,000,000)
2,666,667
To record gross profit.

Cost of construction (2)
Construction in progress (loss)
To record expected loss.
(1)
2,500,000
1,733,333
766,667
11

Requirement 3
Balance Sheet
2006
2007
(tch ly
ca 2006 &
2007)
Current assets:
Accounts receivable
Costs and profit ($2,666,667*) in
excess of billings ($2,500,000)
Current liabilities:
Billings ($5,250,000) in excess
of costs less loss ($4,500,000)
$250,000 $525,000
166,667
$750,000
* Costs ($2,000,000) + profit ($666,667)
12
Problem 5-1
Requirement 1
2006 Cost recovery % :
$180,000
= 60% (gross profit % = 40%)
$300,000
2007 Cost recovery %:
$280,000
= 70% (gross profit % = 30%)
$400,000
2006 gross profit:
Cash collection from 2003 sales = $100,000 x 40% =
$40,000
2007 gross profit:

Cash collection from 2003 sales = $100,000 x 40% =
+ Cash collection from 2004 sales = $150,000 x 30% =
Total 2004 gross profit
$ 40,000
45,000
$85,000
Requirement 2
2006
....................................................................Inventory
.......................................................................180,000
.......................................................................120,000
2006
To record cash collections from installment
sales
Cash...............................................................100,000
.......................................................................100,000
13
2006
To recognize gross profit from installment
sales
.........................................................................40,000
14
Problem 5-1 (continued)

2007
....................................................................Inventory
.......................................................................280,000
.......................................................................120,000
2007
To record cash collections from installment
sales
Cash...............................................................250,000
.......................................................................250,000
2007
sales
.........................................................................85,000
Requirement 3
Date
Cash Collected
Cost Recovery
Gross Profit
2006
2006 sales
$100,000
$100,000
-0-
2007
2006 sales
2007 sales
2007 totals
$100,000
150,000
$250,000
$ 80,000
150,000
$230,000
$20,000
-0$20,000
15
Problem 5-1 (concluded)

2006
....................................................................Inventory
.......................................................................180,000
.......................................................................120,000
2006
To record cash collection from installment
sales
Cash...............................................................100,000
.......................................................................100,000
2007
....................................................................Inventory
.......................................................................280,000
.......................................................................120,000
2007
To record cash collection from installment
sales
Cash...............................................................250,000
.......................................................................250,000
2007
sales
.........................................................................20,000
16
Problem 5-2
LINDOR CORPORATION
Income Statement
For the Year Ended December 31, 2006
Income before income taxes and
extraordinary item .......................................
Income tax expense .......................................
Income before extraordinary item .................
Extraordinary item:
Gain from settlement of lawsuit (net of
$480,000 tax expense) ..................................
Net Income ....................................................
[1] $3,680,000
1,472,000
2,208,000
720,000
$2,928,000
Income before extraordinary item .................

Extraordinary item ........................................
Net income ....................................................
[1]
2.21
0.72
$ 2.93
Income from continuing operations before income taxes:

Unadjusted
$4,200,000
Add:
Gain from sale of equipment
50,000
Deduct: Inventory write-off
(400,000)
Depreciation expense (2003)
(50,000)
Overstated profit on installment sale
(120,000) *
Adjusted
$3,680,000
* Profit recognized ($400,000 - 240,000)

Profit that should have been recognized
(gross profit ratio of 40% x $100,000)
Overstated profit
$160,000
(40,000)
$120,000
17
Problem 5-5
Requirement 1
Contract price
(actual in 2008)
2006
$10,000,000
2,400,000
5,600,000
8,000,000
2007
$10,000,000
6,000,000
2,000,000
8,000,000
2008
$10,000,000
8,200,000
-08,200,000
$ 2,000,000
$ 2,000,000
$ 1,800,000

2006: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2007: $6,000,000
= 75.0% x $2,000,000 = $1,500,000 - 600,000 =
$900,000
$8,000,000
2008: $1,800,000 - 1,500,000 = $300,000
Requirement 2
2006
2007
2008
Various accounts
2,400,000
3,600,000
2,200,000
2,400,000
3,600,000
2,200,000
Accounts receivable
2,000,000
4,000,000
4,000,000
2,000,000
4,000,000
4,000,000
Cash
Accounts receivable
1,800,000
3,600,000
4,600,000
1,800,000
3,600,000
4,600,000
Construction in progress (gross profit)

600,000
900,000
300,000
Cost of construction (cost incurred)
2,400,000
3,600,000
2,200,000
Revenue from long-term contracts (1)
3,000,000
4,500,000
2,500,000
18
Problem 5-5 (continued)

(1) Revenue recognized:
2006: 30% x $10,000,000 =
2007: 75% x $10,000,000 =
Less: Revenue recognized in 2003
Revenue recognized in 2004
2008: 100% x $10,000,000 =
Less: Revenue recognized in 2003 & 2004
Revenue recognized in 2005
$3,000,000
$7,500,000
(3,000,000)
$4,500,000
$10,000,000
(7,500,000)
$2,500,000
Requirement 3
Balance Sheet
Current assets:
Accounts receivable
Less: Billings
Costs and profit in excess
of billings
2006
2007
$ 200,000
$3,000,000
(2,000,000)
$600,000
$7,500,000
(6,000,000)
1,000,000
1,500,000
Requirement 4
Costs incurred during the year
as of year-end
Contract price
Estimated gross profit
(actual in 2008)
2006
$2,400,000
5,600,000
2007
2008
$3,800,000 $3,200,000
3,100,000
2006
$10,000,000
2,400,000
5,600,000
8,000,000
2007
2008
$10,000,000 $10,000,000
6,200,000 9,400,000
3,100,000
-09,300,000 9,400,000
$ 2,000,000
$ 700,000 $ 600,000
19

2006: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2007: $6,200,000
= 66.6667% x $700,000 = $466,667 - 600,000 =
$(133,333)
$9,300,000
2008:
$600,000 - 466,667 = $133,333
Requirement 5
as of year-end
Contract price
(actual in 2008)
2006
$2,400,000
2007
$3,800,000
5,600,000
4,100,000
2008
$3,900,000
-
2006
$10,000,000
2,400,000
5,600,000
8,000,000
2007
2008
$10,000,000 $10,000,000
6,200,000 10,100,000
4,100,000
-010,300,000 10,100,000
$ 2,000,000
$ (300,000) $ (100,000)

2006:
$2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2007:
$(300,000) - 600,000 = $(900,000)
2008:
$(100,000) - (300,000) = $200,000
20
Problem 5-6
Requirement 1
Year
2006
2007
2008
Total gross profit
Gross profit recognized

-0-0$1,800,000
$1,800,000
Requirement 2
Various accounts
2006
2007
2008
2,400,000
3,600,000
2,200,000
2,400,000
3,600,000
2,200,000
Accounts receivable
2,000,000
4,000,000
4,000,000
2,000,000
4,000,000
4,000,000
Cash
Accounts receivable
1,800,000
3,600,000
4,600,000
1,800,000
3,600,000
4,600,000
Construction in progress (gross profit)

Cost of construction (costs incurred)
1,800,000
8,200,000
10,000,000
(contract price)
Requirement 3
Balance Sheet
Current assets:
Accounts receivable
Less: Billings
Costs in excess of billings
2006
2007
$ 200,000
$ 600,000
$2,400,000
(2,000,000)
$6,000,000
(6,000,000)
400,000
-0-
21

Requirement 4
as of year-end
Year
2006
2007
2008
Total gross profit
2006
$2,400,000
5,600,000
2007
2008
$3,800,000 $3,200,000
3,100,000
Gross profit recognized

-0-0$600,000
$600,000
Requirement 5
as of year-end
Year
2006
2007
2008
Total project loss
2006
$2,400,000
5,600,000
2007
2008
$3,800,000 $3,900,000
4,100,000
Gross profit (loss) recognized

-0$(300,000)
200,000
$(100,000)
22

Answer Chap05

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Exercise 5-1

Cash collected x Gross profit percentage = Gross profit recognized

2007 deferred gross profit balance:

2004 initial gross profit ($380,000 - 247,000)

Exercise 5-5 (continued)

Exercise 5-5 (concluded)

.......To recognize gross profit from

Gross profit recognition:

$125,000 - $100,000 = $25,000

* Costs ($300,000) + profit ($100,000)

Exercise 5-6 (concluded)

Gross profit (loss) recognition:

2008: $(200,000) - (100,000) = $(100,000)

Exercise 5-10 (continued)

To record gross profit.

Exercise 5-10 (concluded)

* Costs ($2,000,000) + profit ($666,667)

2007 gross profit:

Problem 5-1 (continued)

Problem 5-1 (concluded)

Income before extraordinary item .................

Income from continuing operations before income taxes:

* Profit recognized ($400,000 - 240,000)

Gross profit (loss) recognition:

Construction in progress (gross profit)

Problem 5-5 (continued)

Problem 5-5 (concluded)

$600,000 - 466,667 = $133,333

Gross profit (loss) recognition:

$(300,000) - 600,000 = $(900,000)

$(100,000) - (300,000) = $200,000

Gross profit recognized

Construction in progress (gross profit)

To record gross profit.

Problem 5-6 (concluded)

Gross profit recognized

Gross profit (loss) recognized

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