Acct Forum/Excel

Forum 7

D.C. System Services provides its customers with computer-based services over an extended period. Customers are required to prepay the entire fee for the extended service. D. C. performs initial setup activities to enter a customer into its system. The initial setup allows the customer to receive automated services from D. C. from that point forward in the service agreement.

 

The management of D.C. plans to recognize the revenue over the life of the service contract, but plans to recognize a disproportionate amount of revenue at the beginning of the contract as a result of the completion of the setup activities and the cost incurred in connection with the completion of the setup activities.

 

Required:

 

Do you agree with the proposal by the management of D.C. regarding revenue recognition related to the setup activities? How should revenue be recognized for an agreement such as this?

Excel Problems

8-21

Percentage-of-Completion Accounting

Perfectionist Construction Company was the low bidder on an office building construction contract. The

contract bid was $9,000,000, with an estimated cost to complete the project of $7,000,000. The contract

period was 30 months starting May 1, 2014. The company uses the cost-to-cost method of estimating

earnings. Because of changes requested by the customer, the contract price was adjusted downward to

$8,600,000 on May 1, 2015.

A record of construction activities for the years 2014–2017 is as follows:

Year

Actual Cost—

Current Year

Progress

Billings

Cash

Receipts

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,900,000 $2,500,000 $1,900,000

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,400,000 3,100,000

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,670,000 2,700,000 2,500,000

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000

The estimated cost to complete the contract as of the end of each accounting period is:

2014 $5,150,000

2015 1,600,000

2016 0

Exercise 8-20

4

Exercise 8-21

4

C8 | Revenue Recognition E O C 8 - 43

Calculate the gross profit for the years 2014–2016 under the percentage-of- completion method of

revenue recognition. (Note: Round percentage to two decimal places for percentage completed.)

8-28

Installment Sales Accounting

Jordan Corporation had sales in 2014 of $150,000, in 2015 of $180,000, and in 2016 of $225,000. The gross

profit percentage of each year, in order, was 25%, 30%, and 35%. Past history has shown that 20% of total

sales are collected in the first year, 40% in the second year, and 20% in the third year. Assuming these collections

are made as projected, give the journal entries for 2014, 2015, and 2016, assuming the installment

sales method. Ignore provisions for bad debts and interest.

8-33

Construction Accounting

The Rushing Construction Company obtained a construction contract to build a highway and bridge

over the Snake River. It was estimated at the beginning of the contract that it would take three years to

complete the project at an expected cost of $50,000,000. The contract price was $60,000,000. The project

actually took four years, being accepted as completed late in 2016. The following information describes the

status of the job at the close of production each year.

2013 2014 2015 2016 2017

Actual cost incurred. . . . . . . . . . . . . . $12,000,000 $18,160,000 $14,840,000 $10,000,000 $ 0

Estimated cost to complete . . . . . . 38,000,000 27,840,000 10,555,555 0 0

Collections on contract . . . . . . . . . . 12,000,000 13,500,000 15,000,000 15,000,000 4,500,000

Billings on contract. . . . . . . . . . . . . . . 13,000,000 15,500,000 17,000,000 14,500,000 0

Instructions:

1. What is the revenue, cost, and gross profit recognized for each of the years 2013–2017 under (a) the

percentage-of-completion method and (b) the completed-contract method?

2. Give the journal entries for each year assuming that the percentage-of-completion method is used.

(Note: Round percentage to nearest whole percent for percentage completed.)