Problem 1:

You are the Senior Accountant for the Patty Corporation, which has several divisions. They each
keep their own accounting books and have chosen the appropriate method of revenue recognition
based on their operations.

Pat's Electronics Division

Pat's Electronics Division sells computers through agents in various cities. Agents send orders
and down payments to our company. The division then ships the goods F.O.B. shipping point
directly to the customers. Revenue is recognized at the point of sale.

Additional Financial Data

Orders for fiscal year 2016

$ 3,000,000

Down payments collected in 2016

$ 300,000

Billed and shipped in 2016

$ 2,400,000

Freight billed in 2016

$ 70,000

Commissions paid to agents (after ship to customer)

10%

Warranty returns as % of sales

1%

Pickle Construction Division

The Pickle Construction Division was working on one project for the 2016 fiscal year. They use
the percentage of completion revenue recognition method.

Contract for new administration building

Total contract amount

$ 60,000,000
Contract grant date
August 14, 2016

Construction began
September 1, 2016

Estimated cost to complete at beginning of contract

$ 52,000,000

Estimated time to complete project

2 years

As of Dec 31, 2016

Construction costs incurred to date

$ 14,140,000

Billings to date
$ 19,500,000

Expected costs to complete

$ 36,360,000

Peace Book Distribution Division

Peace Book Distribution Division sells to national bookstores. Our division allows for up to
25% of sales in returns. For the past 4 years, returns have averaged 20%. We record revenue
based on revenue recognition when the right of return exists.

Total sales for 2016

$ 9,000,000

Sales still available for return for six months

$ 2,000,000

Actual returns on sales not returnable

21%

2015 sales collected in 2016

$ 2,500,000
2015 sales returned in 2016
19%

Required:

(a) We have studied several methods of revenue recognition. Define and describe each of the
following methods of revenue recognition and indicate whether each is in accordance with
generally accepted accounting principles.

- Point of sale

- Completion-of-production

- Percentage-of-completion

- Installment-sales

(b) Calculate the revenue to be recognized in fiscal year 2016 for each division of Patty
Corporation in accordance with generally accepted accounting principles. Show all calculations
for full credit.

Solution:
a.
- Point of sale. Under this method, revenue is recorded at the moment the product or service is delivered;
this method is in accordance with GAAP.
 - Completion-of-production. Under this method, companies recognize revenues and gross profit
only when the contract is completed. According to our text book, “the company accumulates
construction costs in an inventory account (Construction in Process), and it accumulates
progress billings in a contra inventory account (Billings on Construction in Process)”. This
method is not in accordance with GAAP, GAAP allows the Percentage of completion method
instead.

- Percentage-of-completion. Under this method, revenue and gross profits are recognized based
upon the progress of the construction, this means that only the part that has been completed is
recognized, this method is usually used for long term contracts. Percentage of completion is in
accordance with GAAP.

- Installment-sales. This method records revenue when payment has been received not when sale or
service takes place. This method is not in accordance with GAAP.

b.

Pat’s Electronic Division

2,400,000 x 10%= 240,000

2,400,000 x 1%= 24,000

2,400,000-240,000-24,000= $2,136,000

Pickle Construction Division

14,140,000/52,000,000= 27.19 % Percent Completed
60,000,000 x 27.19%= 16,314,000

Peace Book Distribution

9,000,000- (2,000,000 x 21%) – (2,500,000 X19%)=

9,000,000- 420,000– 475,000=

8,580,000 – 475,000 =
8,105,000

Problem 2:
Curiosity Company

Curiosity Company provided the following financial information for its installment-sales for the
current year.

Financial Data

Installment sales for current year

$ 800,000

Cost of goods sold on installment basis

$ 600,000
Payments by customers
$ 320,000

Repossessed merchandise - unpaid balances

$ 52,000

Repossessed merchandise - estimated value

$ 26,800

Required:

a) Prepare journal entries for the end of the year based on the information above.

Installment Accounts Receivable 800,000

Installment Sales 800,000

(To record sales made on installment)

Cost of Installment Sales 600,000

Inventory (or Purchases) 600,000

(To record cost of goods sold on installment)

Cash 320,000

Installment Accounts Receivable 320,000

(To record cash collected on installment receivables)

b) Prepare the entry to record the gross profit realized in the current year.

Gross profit 800,000/320,000= 40%= 320,000 X 40%= 128,000

Installment sales 800,000

Gross Profit 128,000
Deferred Gross Profit 672,000