Exercise 5-1
On June
1, 2011, the Luttman and Dowd Company sold inventory to the Ushman Corporation
for $400,000. Terms of the sale called
for a down payment of $100,000 and four annual installments of $75,000 due on
each June 1, beginning June 1, 2012.
Each installment also will include interest on the unpaid balance
applying an appropriate interest rate.
The inventory cost Foster $150,000.
The company uses the perpetual inventory system.
Required:
1. Compute the amount of gross profit to be
recognized from the installment sale in 2011, 2012, 2013, 2014, and 2015 using
point of delivery revenue recognition. Ignore interest charges.
2. Repeat requirement 1 applying the
installment sales method.
3. Repeat requirement 1 applying the cost
recovery method.
Exercise 5-2
The Ugenti Construction Company
contracted to construct a warehouse building for $2,600,000. Construction began in 2011 and was completed
in 2012. Data relating to the contract
are summarized below:
2011 2012
Costs incurred during the year…………………………… $
360,000 $1,650,000
Estimated
costs to complete as of 12/31…………… 1,560,000
–
Billings
during the year ……………………………………… 430,000 2,170,000
Cash
collections during the year………………………… 320,000 2,280,000
Required:
1. Compute the amount of gross profit or loss
to be recognized in 2011 and 2012 using the percentage-of-completion method.
2. Compute the amount of gross profit or loss
to be recognized in 2011 and 2012 using the completed contract method.
3. Prepare a partial balance sheet to show how
the information related to this contract would be presented at the end of 2011
using the percentage-of completion method.
4. Prepare a partial balance sheet to show how
the information related to this contract would be presented at the end of 2011
using the completed contract method.
Exercise 5-3
On April 13, 2011, the Pagano
Construction Company entered into a three-year construction contract to build a
mall for a price of $12,000,000. During
2011, costs of $3,000,000 were incurred with estimated costs of $6,000,000 yet
to be incurred. Billings of $3,800,000
were sent and cash collected was $3,250,000.
In 2012, costs incurred were
$4,000,000 with remaining costs estimated to be $5,600,000. 2012 billings were $3,500,000 and $3,600,000
cash was collected. The project was
completed in 2013 after additional costs of $5,800,000 were incurred. The company’s fiscal year-end is December
31. Arrow uses the percentage-of-completion
method.
Required:
1. Calculate the amount of gross profit or
loss to be recognized in each of the three years.
2. Prepare journal entries for 2011 and 2012
to record the transactions described (credit “Various accounts” for
construction costs incurred).
3. Prepare a partial balance sheet to show the
presentation of the project as of December 31, 2011 and 2012.
Exercise 5-4
On November 15, 2011, the
Coldstone Ice Cream Company entered into a franchise agreement with an
individual. In exchange for an initial
franchise fee of $25,000, Coldstone will provide initial services to the
franchisee to include assistance in design and construction of the building,
help in training employees, help in obtaining financing, and management advice
over the first five years of the ten-year franchise agreement.
50% of the initial franchise fee
is payable on November 15, 2011, with the remaining $12,500 payable in five
equal annual installments beginning on November 15, 2012. These installments will include interest at
an appropriate rate. The franchise
opened for business on February 15, 2012.
Required:
Assume that the initial services to be performed by Coldstone
subsequent to November 15, 2011, are substantial and that collectibility of the
installment receivable is reasonably certain.
Substantial performance of the initial services is deemed to have
occurred when the franchise opened.
Prepare the necessary journal entries for the following dates (ignoring
interest charges):
1. November 15, 2011, and
2. February 15, 2012.
Exercise 5-5
The year 2011 income statement of
Garret & Sons Music Company reported net sales of $10 million, cost of
goods sold of $6 million, and net income of $1 million. The following table shows the company’s
comparative balance sheets for 2011 and 2010:
|
($ in 000s) Assets: 2011 2010 Cash…………………………………………………………………………. $ Current liabilities………………………………………………………. $ |
Some industry averages for the
company’s line of business are:
_______________________________________
inventory
turnover 6 times
average
collection period 28 days
asset turnover 2 times
_______________________________________
Required:
Assess Garret & Son’s asset management relative to its industry.
Exercise 5-6
The following condensed
information was reported by Sanders Manufacturing, Inc. for 2011 and 2010:
|
($ in 000s) 2011 2010 Net sales $7,200 $6,800 Balance Sheet information: Current assets…………………………………………………….. $ 800 $ 750 Current liabilities………………………………………………… $ 250 $ 400 |
Required:
1. Determine the following ratios for 2011:
a. profit
margin on sales
b. return on
assets
c. return on
shareholders’ equity
2. Calculate the DuPont framework for Sanders
for 2011.
3. Determine the amount of dividends paid to
shareholders during 2011.
