Revenue Recognition and Construction Contract Accounting Questions

CHAPTER 8
QUESTIONS
1. The two general revenue recognition crite- distinct elements of a multiple-element

ria are that revenue should be recognized arrangement.
when it is realized or realizable and it has c. Recognize revenue as the performance
been earned through substantial comple- obligations are satisfied.
tion of the activities involved in the earnings
8. A company would prefer gross revenue
process.
reporting over net revenue reporting be-
2. SAB 101 was issued by the SEC to curtail cause the larger total revenue number in-
specific abuses in revenue recognition creases the apparent size of the company’s
practices. economic activity. If investors use a price-
to-sales relationship in valuing the com-
3. Question 1 of SAB 101 emphasizes the
pany, gross revenue reporting can lead to a
proper signing of sales agreements to en-
higher stock price.
courage companies to implement good
internal controls surrounding revenue rec- 9. If percentage-of-completion accounting is
ognition. If a company does not have good to be used by construction contractors, the
internal controls in place for processing following elements should be present in the
customer contracts, it becomes much eas- transaction.
ier for company executives to manipulate a. Dependable estimates can be made of
the reported amount of revenue. the extent of progress toward comple-
4. Up-front, nonrefundable fees are not rec- tion, contract revenues, and contract
ognized as revenue immediately because costs.
the earnings process is not complete. b. The contract should clearly specify the
enforceable rights regarding goods or
5. An element of a multiple-element arrange-
services to be provided and received
ment is considered to be a unit of account-
by the parties, the consideration to be
ing if that element has standalone value,
exchanged, and the manner and terms
meaning that it can be sold separately (by
of settlement.
anyone, not necessarily limited to the sell-
er) or the customer can resell it. c. The buyer can be expected to satisfy
obligations under the contract.
6. The three different methods for determining
d. The contractor can be expected to per-
the separate selling price of a single ele-
form the contractual obligation.
ment in a multiple-element transaction are
as follows: e. The related construction activity will oc-
a. Vendor-specific objective evidence cur over two or more accounting period
(VSOE), which is the price at which the (years).
same company sells the same product Because most contractors with significant
or service separately. contract obligations have the experience to
b. Third-party evidence (TPE), which is the make the necessary estimates, it is rec-
price at which other companies sell the ommended that they use percentage-of-
same product or service separately. completion accounting rather than the
c. Best estimate using other data such as completed-contract method.
cost and profit margin data.
10. The cost-to-cost method of measuring the
7. The three basic steps in recognizing reve- percentage of completion is an input meth-
nue under the contract approach are as fol- od and is computed by relating the costs
lows: incurred to date to the total estimated
a. Identify the performance obligations ac- costs. The efforts-expended methods are
cepted by the seller. also input methods, but they are based on
b. Allocate transaction prices based on the ratio of the efforts expended by labor or
relative separate selling prices of any machines on the contract to the total effort
249
250 Chapter 8
expected to be expended. They include la- anticipated, and as expectations of future

bor hours, labor dollars, machine hours, or costs change over the contract time period,
even material quantities. The percentage the total gross profit to be earned on the
computed is then applied to revenue and project also changes. When some profit
costs to determine the amount reported for has already been recognized, these ad-
the period. justments can create large changes in the
reported gross profit percentage from year
11. Output measures of percentage of comple-
to year. These fluctuations would also in-
tion include units produced, contract mile-
crease if a measure of completion other
stones reached, and values added to the
than cost-to-cost was used and if the mi-
contract. Particular examples of output
nority position of the AICPA Construction
measures include miles of roadway, cubic
Contractor Guide Committee was followed.
yards of dirt removed, or architects’ and
engineers’ estimates of job completion. 16. If a loss is anticipated on a contract, the
entire loss should be recognized in the pe-
12. The construction in progress account is
riod when the loss is first anticipated. This
used to accumulate all costs directly
is true under both the completed-contract
chargeable to a contract, including a share
and the percentage-of-completion methods.
of indirect overhead costs and the recog-
Under the completed-contract method, the
nized gross profit earned to date if the
amount of the expected loss is charged to a
company is using the percentage-of-
loss account and credited to Construction
completion method. The progress billings
in Progress. Under the percentage-of-
on construction contracts account is used
completion method, however, the amount of
to accumulate the total progress billings
the current period portion of the loss plus
made on a contract, including any billed re-
any profit recognized in prior periods on the
tainer fees. These accounts are offset
contract must be recognized and reported
against each other on the balance sheet. If
as a loss. Under either method, the balance
Construction in Progress is the larger of the
reported in Construction in Progress will be
two accounts, both are reported in the Cur-
the same.
rent Asset section along with the net posi-
tion of the two. If Progress Billings on Con- 17. The measures used to compute a percent-
struction Contracts is larger, both are re- age of performance in long-term service
ported in the Current Liability section. contracts depend on the nature of the acts
of service to be performed. If the acts of
13. Some accountants feel that the costs re-
service are identical or similar in nature, an
ported under the percentage-of-completion
output measure derived by relating the
method should always be the costs in-
number of acts performed to the total num-
curred to date. If the method of arriving at
ber of acts to be performed over the con-
the percentage of completion is other than
tract life is recommended. If the acts are
the cost-to-cost method, the only way this
defined, but are not identical, the sales
could occur would be to compute revenue
value of the acts performed to date related
as the sum of costs incurred and the com-
to the total contract sales value is used.
puted gross profit rather than by applying
the percentage of completion to the total 18. Newly formed service companies may not
contract price. have adequate historical experience to as-
sess the portion of service completed at a
14. Under percentage-of-completion account-
point in time and therefore may over- or
ing, the difference between recognized
understate margin recognition due to inac-
revenue and recognized costs, or the rec-
curate estimates of perpetual completeness
ognized gross profit, is added to the costs
and therefore of ultimate total costs.
incurred in arriving at the balance reported
in the construction in progress account. 19. The three methods of revenue recognition
that await the receipt of cash are (a) in-
15. The major reason for a fluctuating gross
stallment sales, (b) cost recovery, and (c)
profit percentage under the percentage-of-
cash. Under the installment sales method,
completion method is the revision of esti-
a portion of each cash receipt is recognized
mates that is inherent in this type of con-
as income. Under the cost recovery meth-
tract. As costs incurred differ from those
od, no income is recognized until all costs
Chapter 8 251
are recovered. Under the cash method, all can vary from year to year, it is necessary
costs incurred are expensed immediately, to maintain records that identify sales and
and all cash receipts are recognized as collections by year and to maintain a record
revenue. Costs incurred are deferred and of each year’s gross profit percentage.
matched against cash received under both
22. Interest on installment sales contracts
the installment sales and cost recovery
should be recognized each period as
methods. As indicated previously, under
earned. Each cash collection, therefore,
the cash method all costs are expensed
should be reduced by the interest earned
immediately.
before the gross profit percentage is ap-
20. The installment sales method of accounting plied to the balance of the collection to de-
is preferred over the full accrual method if termine the gross profit earned.
cash collection is highly uncertain and if the
23. The cash method of recognizing revenue
amount of loss due to uncollectible ac-
would be acceptable for reporting purposes
counts cannot be reasonably estimated.
only if the probability of recovery of product
This can occur if the sales transaction is
or service costs is slight. Seldom would the
unusual in nature and involves a customer
method be appropriate for product or real
in a way that default carries little cost or
estate sales because of repossession
penalty.
rights held by the seller. However, in ser-
21. Installment sales accounting requires vice contracts with high initial costs and
recognition of gross profit as the cash is great uncertainty as to collection, the cash
collected. The amount to be recognized is method might be appropriate.
based on the gross profit percentage of the
sales year. Because these percentages
252 Chapter 8
PRACTICE EXERCISES
PRACTICE 8–1 BASIC JOURNAL ENTRIES FOR REVENUE RECOGNITION
1. Cash ......................................................................................... 1,000

Unearned Service Revenue .............................................. 1,000
2. Unearned Service Revenue ................................................... 1,000

Service Revenue ............................................................... 1,000
PRACTICE 8–2 REVENUE IN A MULTIPLE-ELEMENT ARRANGEMENT UNDER

SUBTOPIC 605-25
Equipment delivery = $280,645 = $300,000 × [$290,000/($290,000 + $20,000)]

Installation = $19,355 = $300,000 × [$20,000/($290,000 + $20,000)]
The amount of revenue that should be recognized by Seller Company when the
equipment is delivered but before it is installed is $280,645.
PRACTICE 8–3 REPORTING REVENUE GROSS AND NET
1. Accounts Receivable ($400,000  0.03) ................................ 12,000

Commission Revenue....................................................... 12,000
Cash ......................................................................................... 12,000
Accounts Receivable ........................................................ 12,000
2. Cash ......................................................................................... 400,000

Sales ................................................................................... 400,000
Cost of Goods Sold ................................................................ 280,000
Inventory ............................................................................ 280,000
Commission Expense ............................................................ 12,000
Cash.................................................................................... 12,000
PRACTICE 8–4 COST-TO-COST METHOD
1. Percentage of completion: [$100,000/($100,000 + $450,000)] = 18.182%

Cumulative revenue to be recognized:
$880,000  0.18182 ....................................................... $160,002
Revenue recognized in previous years ......................... 0
Revenue to be recognized in Year 1 .............................. $160,002
Chapter 8 253
PRACTICE 8–4 (Concluded)
2. Percentage of completion: [($100,000 + $150,000)/($100,000 + $150,000 +

$280,000)] = 47.170%
$880,000  0.47170 ........................................................ $415,096
Revenue recognized in previous years .......................... 160,002
Revenue to be recognized in Year 2 ............................... $255,094
3. Percentage of completion: 100.000%

$880,000  1.00000 ........................................................ $880,000
PRACTICE 8–5 EFFORTS-EXPENDED METHOD
1. Percentage of completion: [150/(150 + 850)] = 15.000%

$880,000  0.15000 ........................................................ $132,000
Revenue recognized in previous years .......................... 0
2. Percentage of completion: [(150 + 300)/(150 + 300 + 520)] = 46.392%

$880,000  0.46392 ........................................................ $408,250

$880,000  1.00000 ........................................................ $880,000
PRACTICE 8–6 PERCENTAGE OF COMPLETION BASED ON OUTPUT MEASURES
1. Percentage of completion: [3,000/(3,000 + 15,200)] = 16.484%

$880,000  0.16484 ........................................................ $ 145,059
Revenue to be recognized in Year 1 ............................... $ 145,059
254 Chapter 8
2. Percentage of completion: [(3,000 + 7,500)/(3,000 + 7,500 + 8,200)] = 56.150%

$880,000  0.56150 ....................................................... $ 494,120
Revenue recognized in previous years ......................... 145,059
Revenue to be recognized in Year 2 .............................. $ 349,061

$880,000  1.00000 ....................................................... $ 880,000
PRACTICE 8–7 BASIC CONSTRUCTION JOURNAL ENTRIES
1. Construction in Progress ....................................................... 100,000

Materials, Cash, etc. ......................................................... 100,000
Accounts Receivable .............................................................. 200,000
Progress Billings ............................................................... 200,000
Cash ......................................................................................... 180,000

Cash ......................................................................................... 170,000

Cash ......................................................................................... 530,000
PRACTICE 8–8 COMPLETED-CONTRACT JOURNAL ENTRIES
Progress Billings ............................................................................. 880,000

Revenue on Construction Contracts .................................... 880,000
Cost of Construction Contracts ..................................................... 500,000
Construction in Progress ....................................................... 500,000
Chapter 8 255
PRACTICE 8–9 PERCENTAGE-OF-COMPLETION JOURNAL ENTRIES
1. Cost of Construction Contracts ............................................ 100,000

Construction in Progress ...................................................... 60,002
Revenue on Construction Contracts .............................. 160,002


PRACTICE 8–10 CONSTRUCTION CONTRACTS: BALANCE SHEET REPORTING
1. Accounts receivable is reported as a current asset. The balance at the end of

each year is computed as follows:
Year 1: $200,000 – $180,000 = $20,000
Year 2: $20,000 + $200,000 – $170,000 = $50,000
Year 3: $50,000 + $480,000 – $530,000 = $0
2. and 3.
For balance sheet reporting purposes, Progress Billings and Construction in
Progress are netted against one another. If the cumulative amount of Progress
Billings is larger, the net amount is reported as a current liability. If the cumula-
tive amount of Construction in Progress is larger, the net amount is reported as
a current asset.
Year 1
Progress billings: $200,000
Construction in progress: $100,000 (cost) + $60,002 (profit) = $160,002
Net current liability of $39,998 ($200,000 – $160,002)
Year 2
Progress billings: $200,000 beginning balance + $200,000 = $400,000
Construction in progress: $160,002 (beginning balance) + $150,000 (cost) +
$105,094 (profit) = $415,096
Net current asset of $15,096 ($400,000 – $415,096)
Year 3
Progress billings: $400,000 beginning balance + $480,000 = $880,000
Construction in progress: $415,096 (beginning balance) + $250,000 (cost) +
$214,904 (profit) = $880,000
256 Chapter 8
No net amount is reported because both Construction in Progress and Pro-

gress Billings are equal to $880,000. It would be appropriate to report the two
amounts, netting to zero, in either the Current Asset or Current Liability section
of the balance sheet.
PRACTICE 8–11 MULTIPLE YEARS OF REVENUES AND COSTS: COST-TO-COST

METHOD
1. Percentage of completion: [$280,000/($280,000 + $760,000)] = 26.9231%

$1,800,000  0.269231 .................................................. $484,616
Revenue recognized in previous years ......................... 0
Revenue to be recognized in Year 1 .............................. $484,616
Cumulative cost to be recognized:
($280,000 + $760,000)  0.269231................................ $280,000
Cost recognized in previous years ................................ 0
Cost to be recognized in Year 1 ..................................... $280,000
Cost of Construction Contracts ........................................... 280,000

$380,000)] = 63.8095%
$1,800,000  0.638095 .................................................. $1,148,571
($280,000 + $390,000 + $380,000)  0.638095 ............ $ 670,000
Cost recognized in previous years ................................ 280,000
Cost to be recognized in Year 2 ..................................... $ 390,000
Chapter 8 257

$1,800,000  1.000000 ................................................... $1,800,000
Revenue recognized in previous years .......................... 1,148,571
($280,000 + $390,000 + $370,000)  1.000000 ............. $1,040,000
Cost recognized in previous years ................................. 670,000
Cost to be recognized in Year 3 ...................................... $ 370,000
Construction in Progress ..................................................... 281,429
PRACTICE 8–12 MULTIPLE YEARS OF REVENUES AND COSTS: OUTPUT MEASURE
1. Percentage of completion: [9,800/(9,800 + 20,300)] = 32.5581%

$1,800,000  0.325581 ................................................... $586,046
($280,000 + $760,000)  0.325581 ................................ $338,604
Cost recognized in previous years ................................. 0
Cost to be recognized in Year 1 ...................................... $338,604
2. Percentage of completion: [(9,800 + 10,200)/(9,800 + 10,200 + 10,000)] =

66.6667%
$1,800,000  0.666667 ................................................... $1,200,000
($280,000 + $390,000 + $380,000)  0.666667 ............. $ 700,000
Cost recognized in previous years ................................. 338,604
Cost to be recognized in Year 2 ...................................... $ 361,396
258 Chapter 8

$1,800,000  1.000000 .................................................. $1,800,000
Revenue recognized in previous years ......................... 1,200,000
($280,000 + $390,000 + $370,000)  1.000000 ............ $ 1,040,000
Cost recognized in previous years ................................ 700,000
Cost to be recognized in Year 3 ..................................... $ 340,000
PRACTICE 8–13 MULTIPLE YEARS OF REVENUES AND COSTS: ANTICIPATED

LOSS
1. Percentage of completion: [$200,000/($200,000 + $1,150,000)] = 14.8148%

$1,450,000  0.148148 .................................................. $214,815
Revenue recognized in previous years ........................ 0
Revenue to be recognized in Year 1 ............................. $214,815
With the cost-to-cost method, the percentage of cost and the actual cost are the
same, unless the contract has an anticipated loss as illustrated in Year 2.
$1,020,000)] = 35.0319%
However, the contract now has a total anticipated loss of $120,000 [$1,450,000 –
($200,000 + $350,000 + $1,020,000)].
$1,450,000  0.350319 .................................................. $507,963
Revenue recognized in previous years ........................ 214,815
Revenue to be recognized in Year 2 ............................. $293,148
($507,963 + $120,000 anticipated loss) ...................... $627,963
Cost recognized in previous years ............................... 200,000
Cost to be recognized in Year 2 .................................... $427,963
Construction in Progress ................................................. 134,815
Chapter 8 259

$1,450,000  1.000000 ................................................... $1,450,000
Revenue recognized in previous years ........................ 507,963
Revenue to be recognized in Year 3 ............................. $ 942,037
($200,000 + $350,000 + $915,000)  1.000000 ............. $1,465,000
Cost recognized in previous years ............................... 627,963
Cost to be recognized in Year 3 .................................... $ 837,037
PRACTICE 8–14 JOURNAL ENTRIES FOR THE PROPORTIONAL PERFORMANCE

METHOD
1. Cash (1,900  $600) ................................................................ 1,140,000

Unearned Season Ticket Revenue .................................. 1,140,000
2. Deferred Initial Season Ticket Costs .................................... 180,000

Cash ................................................................................... 180,000
3. Unearned Season Ticket Revenue ........................................ 435,273

Season Ticket Revenue [$1,140,000  (21/55)] ............... 435,273
Season Ticket Game Costs ................................................... 119,700
Cash (1,900  $3  21) ....................................................... 119,700
Initial Season Ticket Costs [$180,000  (21/55)] .................. 68,727
Deferred Initial Season Ticket Costs .............................. 68,727
PRACTICE 8–15 INSTALLMENT SALES: BASIC JOURNAL ENTRIES
Installment Accounts Receivable .................................................. 350,000

Installment Sales .................................................................... 350,000
Cost of Installment Sales ($350,000  0.80) .................................. 280,000
Inventory ................................................................................. 280,000
Cash ($350,000  0.40) .................................................................... 140,000
Installment Accounts Receivable ......................................... 140,000
Installment Sales ............................................................................. 350,000
Cost of Installment Sales ....................................................... 280,000
Deferred Gross Profit ............................................................. 70,000
260 Chapter 8
Deferred Gross Profit ...................................................................... 28,000

Realized Gross Profit on Installment Sales ......................... 28,000
($140,000 collected  20% profit margin = $28,000)
or ($70,000 deferred gross profit  40% cash collected = $28,000)
PRACTICE 8–16 INSTALLMENT SALES: FINANCIAL STATEMENT REPORTING
Installment sales receivable: $350,000 – $140,000 = $210,000

Deferred gross profit: $70,000 – $28,000 = $42,000
Balance sheet reporting:
Installment sales receivable .......................................... $210,000
Less deferred gross profit ............................................. (42,000)
Net installment sales receivable ................................... $168,000
PRACTICE 8–17 INSTALLMENT SALES: INTEREST ON RECEIVABLES
1. Installment Accounts Receivable.......................................... 200,000

Installment Sales ............................................................... 200,000
Inventory ............................................................................ 110,000
Cash ......................................................................................... 90,000
Installment Accounts Receivable .................................... 48,000
Interest Revenue ($200,000  0.21) .................................. 42,000
Cost of Goods Sold ........................................................... 110,000
Deferred Gross Profit........................................................ 90,000
Deferred Gross Profit ............................................................. 21,600*
Realized Gross Profit ........................................................ 21,600
*($48,000/$200,000)  $90,000
2. Installment Accounts Receivable.......................................... 220,000

Inventory ............................................................................ 130,000
Cash ......................................................................................... 200,000
Installment Accounts Receivable .................................... 121,880
Interest Revenue ............................................................... 78,120
From Year 1: ($200,000 – $48,000)  0.21 = $31,920
From Year 2: $220,000  0.21 = $46,200
$31,920 + $46,200 = $78,120
Chapter 8 261

Cost of Goods Sold .......................................................... 130,000
Deferred Gross Profit ....................................................... 90,000
Deferred Gross Profit ............................................................. 52,645
Realized Gross Profit ....................................................... 52,645
From Year 1: Principal cash collections = $100,000 – $31,920 = $68,080
From Year 2: Principal cash collections = $100,000 – $46,200 = $53,800
From Year 1: Realized gross profit = ($68,080/$200,000)  $90,000 = $30,636
From Year 2: Realized gross profit = ($53,800/$220,000)  $90,000 = $22,009
$30,636 + $22,009 = $52,645
PRACTICE 8–18 COST RECOVERY METHOD: BASIC JOURNAL ENTRIES

Year 1 Year 2 Year 3
Cash Gross Profit Cash Gross Profit Cash Gross Profit
Collected Recognized Collected Recognized Collected Recognized
Year 1 $140,000 $175,000 $ 0
Sales = $350,000 $ 0 $35,000 $ 0
Gross Profit % = 20%
COGS = $280,000
Year 2  108,000 135,000

Sales = $270,000  0 40,500
COGS = $202,500
Year 3   84,000
Sales = $210,000   0
COGS = $147,000
1. Installment Accounts Receivable—Year 1 ........................... 350,000

Installment Sales............................................................... 350,000
Inventory ............................................................................ 280,000
Cash ......................................................................................... 140,000
Installment Accounts Receivable—Year 1 ..................... 140,000
Cost of Goods Sold .......................................................... 280,000
Deferred Gross Profit—Year 1 ......................................... 70,000
262 Chapter 8

Inventory ............................................................................ 202,500
Cash ......................................................................................... 108,000
Cash ......................................................................................... 175,000
Deferred Gross Profit—Year 1 ............................................... 35,000

Inventory ............................................................................ 147,000
Cash ......................................................................................... 84,000
Cash ......................................................................................... 135,000
Deferred Gross Profit—Year 2 ............................................... 40,500
Chapter 8 263
EXERCISES
8–19.
2015 2016
Construction in Progress ................ 1,930,000 2,290,000
Materials, Labor, Cash, etc. ....... 1,930,000 2,290,000
To record costs incurred
on contract.
Accounts Receivable ....................... 2,100,000 2,900,000
Progress Billings on
Construction Contracts ............ 2,100,000 2,900,000
To record contract billings.
Cash ................................................... 1,800,000 3,200,000
Accounts Receivable .................. 1,800,000 3,200,000
To record collections on
contract.
Construction Contracts .................. 5,000,000
Revenue from Long-Term
Construction Contracts ............ no entry 5,000,000
To record recognition
of revenue.
Cost of Long-Term
Construction Contracts ................. no entry 4,220,000
Construction in Progress ........... 4,220,000
To record recognition
of expenses.
8–20.
1. Total gross profit recognized on contract:
2014 .......................................... $ 75,000
2015 .......................................... 140,000
2016 .......................................... (20,000)
$195,000
Total cost incurred on contract:
Contract price ............................................. $2,000,000
Less gross profit recognized .................... 195,000
Total cost incurred ............................................ $1,805,000
Total cost incurred in 2015:
Total cost incurred—contract ................... $1,805,000
Less cost incurred:
2014.......................................................... $360,000
2016.......................................................... 820,000 1,180,000
Total cost incurred—2015 ................................. $ 625,000
264 Chapter 8
8–20. (Concluded)
2. Total cost incurred and gross profit recognized to the end of 2015:
Cost Gross Profit
Incurred Recognized Total
2014 .................................... $360,000 $ 75,000 $ 435,000
2015 .................................... 625,000 140,000 765,000
$985,000 $215,000 $1,200,000
Percentage of job completed at the end of 2015:
Total cost incurred and gross profit recognized
to end of 2015 .................................................................... $1,200,000
Total contract price .............................................................. 2,000,000
Percentage of project completed by the end of 2015....... 60%
3. Total gross profit recognized to end of 2015 ........................... $ 215,000
Percentage of project completed by end of 2015 .................... ÷ 60%
Total estimated gross profit on project as of end of 2015 ... $ 358,333
4. Total cost incurred to end of 2015 ............................................ $ 985,000
Percentage of project completed by end of 2015 .................... ÷ 60%
Total estimated cost on contract as of end of 2015 ............. $1,641,667
Less cost incurred to date ......................................................... 985,000
Estimated cost to complete contract as of end of 2015 ....... $ 656,667
8–21.
2014 2015 2016
1. Actual cost incurred to date ......... $1,900,000 $5,500,000 $7,170,000
2. Estimated cost to complete
contract ........................................ 5,150,000 1,600,000 0
3. Total estimated cost ...................... $7,050,000 $7,100,000 $7,170,000
Percentage of completion
to date [(1)/(3)] ............................. 26.95% 77.46% 100.00%
Recognized Recognized
in in
To Date Prior Years Current Year
2014—(26.95% completed):
Recognized revenue
($9,000,000  26.95%) .................. $2,425,500 $2,425,500
Cost (actual cost) ........................... 1,900,000 1,900,000
Gross profit .................................. $ 525,500 $ 525,500
2015—(77.46% completed):
Recognized revenue
($8,600,000  77.46%) .................. $6,661,560 $2,425,500 $ 4,236,060
Cost (actual cost) ........................... 5,500,000 1,900,000 3,600,000
Gross profit .................................. $1,161,560 $ 525,500 $ 636,060
2016—(100.00% completed):
Recognized revenue ...................... $8,600,000 $6,661,560 $ 1,938,440
Cost ................................................. 7,170,000 5,500,000 1,670,000
Gross profit .................................. $1,430,000 $1,161,560 $ 268,440
Chapter 8 265
8–22. 1. $20,000 ($220,000 – $200,000)

2. $260,000 ($250,000 + $10,000)
3. $370,000 [$850,000 – ($220,000 + $260,000)]
4. $380,000 ($370,000 + $10,000)
5. $830,000 ($200,000 + $250,000 + $380,000)
6. $86,095
2015: 450/640 = 0.7031; 0.7031  $850,000 = $ 597,635 Cumulative revenue
less cumulative costs (450,000)
Cumulative gross profit $ 147,635
2014: 200/650 = 0.3077; 0.3077  $200,000 = (61,540) Gross profit
recognized—2014
$ 86,095 Gross profit
recognized—2015
8–23.
1. Percentage-of-completion method:
2015 Contract price ............................................. $200,000
Less estimated cost:
Cost to date ............................................ $60,000
Estimated cost to complete project...... 59,000 119,000
Estimated gross profit ........................... $ 81,000
Percentage completed ($60,000/$119,000) 50.42%
Estimated gross profit—2015
($81,000  50.42%) .................................. $ 40,840
Balance sheet:
Current assets:
Accounts receivable
($80,000 billed – $55,000 received) $ 25,000
Construction in progress .................. $100,840*
Less: Progress billings on
construction contracts ................... 80,000 20,840
*$60,000 cost to date + $40,840 income = $100,840
Income statement:
Revenue ($200,000  0.5042) ................. $100,840
Cost of construction .............................. 60,000
Gross profit ............................................. $ 40,840
2. Completed-contract method:
Balance sheet:
Current assets:
Accounts receivable .................................. $25,000
Current liabilities:
Progress billings on construction
contracts .................................................. $80,000
Less: Construction in progress ................ 60,000 20,000
Income statement:
Nothing reported. No contract was completed.
266 Chapter 8
8–24. 2014 Construction in Progress ................................... 7,600,000

Materials, Labor, Cash, etc. .......................... 7,600,000
Accounts Receivable .......................................... 9,500,000
Progress Billings on Construction
Contracts ...................................................... 9,500,000
Cash ..................................................................... 9,000,000
Accounts Receivable...................................... 9,000,000
Cost of Long-Term Construction Contracts..... 7,800,000*
Construction in Progress ................................... 1,200,000†
Revenue from Long-Term Construction
Contracts ...................................................... 9,000,000
*0.30  $26,000,000 = $7,800,000
†
0.30  $4,000,000 ($30,000,000 – $26,000,000) = $1,200,000
2015 Construction in Progress ................................... 9,700,000
Contracts ...................................................... 11,500,000
Cash ..................................................................... 10,300,000
Construction in Progress ................................... 1,840,000†
Contracts ...................................................... 15,000,000
*0.80  $26,200,000 = $20,960,000;
$20,960,000 – $7,800,000 = $13,160,000
†
0.80  ($30,000,000 – $26,200,000) = $3,040,000;
$3,040,000 – $1,200,000 = $1,840,000
2016 Construction in Progress ................................... 8,800,000
Contracts ...................................................... 9,000,000
Cash ..................................................................... 10,700,000
Construction in Progress ................................... 860,000
Contracts ...................................................... 6,000,000
*$26,100,000 – ($13,160,000 + $7,800,000) = $5,140,000
Progress Billings on Construction Contracts .. 30,000,000
Construction in Progress............................... 30,000,000
Chapter 8 267
8–25. 2014 Construction in Progress................................... 7,200,000

Accounts Receivable.......................................... 7,200,000
Contracts ...................................................... 7,200,000
Cash ..................................................................... 6,500,000
Accounts Receivable ..................................... 6,500,000
2015 Construction in Progress................................... 6,700,000
Contracts ...................................................... 6,500,000
Cash ..................................................................... 6,400,000
Anticipated Loss on Long-Term Construction
Contracts............................................................ 700,000*
Construction in Progress .............................. 700,000
$700,000 of loss recognized in 2015.
*Contract price ..................................... $21,000,000
Costs incurred 2014–2015 .............. $13,900,000
Estimated cost to complete ............ 7,800,000 21,700,000
Estimated loss ................................. $ (700,000)
2016 Construction in Progress................................... 7,900,000

Contracts ...................................................... 7,300,000
Cash ..................................................................... 8,100,000
Progress Billings on Construction Contracts 21,000,000
Construction Contracts .............................. 21,000,000
Cost of Long-Term Construction Contracts .... 21,100,000
Construction in Progress .............................. 21,100,000
268 Chapter 8
8–26. Costs— Estimated Cost Estimated Contract

2015 to Complete Total Cost Price
Basic contract ................. $8,000,000 $28,000,000 $36,000,000 $42,000,000
Change Order 1 ............... 50,000 50,000 100,000 125,000
Change Order 2 ............... — 50,000 50,000 —
Change Order 3 ............... 300,000 300,000 600,000 600,000
Change Order 4 ............... 125,000 — 125,000 100,000
$8,475,000 $28,400,000 $36,875,000 $42,825,000
Percentage completed:
$8,475,000/$36,875,000 = 22.98%
Revenues: 22.98%  $42,825,000 .................................. $9,841,185
Costs actually incurred .................................................. 8,475,000
Gross profit to be recognized in 2015 .......................... $1,366,185
8–27. 2015
May 1 Cash ...................................................................... 1,200
Unearned Equipment Use Fees ..................... 996
Unearned Evaluation Fees ............................. 181
Unearned Magazine Fees ............................... 23
To record receipt of cash and establish
liabilities for services owed.
Unearned equipment use fee: [$1,100/($1,100 + $200 + $25)]  $1,200 = $996
Unearned evaluation fee: [$200/($1,100 + $200 + $25)]  $1,200 = $181
Unearned magazine fee: [$25/($1,100 + $200 + $25)]  $1,200 = $23
1 Deferred Initial Equipment Use Cost ................. 150

Deferred Initial Evaluation Cost ......................... 27
Deferred Initial Magazine Cost ........................... 3
Cash ................................................................. 180
To record prepayment of costs.
Deferred initial equipment use cost: [$1,100/($1,100 + $200 + $25)]  $180 =
$150 (rounded up)
Deferred initial evaluation cost: [$200/($1,100 + $200 + $25)]  $180 = $27
Deferred initial magazine cost: [$25/($1,100 + $200 + $25)]  $180 = $3
1 Initial Evaluation Costs ....................................... 127
Deferred Initial Evaluation Cost ..................... 27
Cash ................................................................. 100
To record costs of initial fitness
evaluation.
1 Unearned Evaluation Fees ................................ 181
Fitness Evaluation Fees ................................. 181
To recognize revenue from fitness
evaluation.
Chapter 8 269
8–27. (Concluded)
May– Equipment Use Costs ......................................... 196

Dec. Magazine Costs ................................................... 4
Cash ................................................................. 200
Total direct costs of rendering
equipment and magazine service:
8 months  $25 = $200.
Equipment use costs: [$1,100/($1,100 + $25)]  $200 = $196
Magazine costs: [$25/($1,100 + $25)]  $200 = $4
Dec. 31 Unearned Magazine Fees ................................... 15
Magazine Fees ............................................... 15
To recognize eight months’ revenue on
magazine; $23  (8/12) = $15.
31 Unearned Equipment Use Fees ......................... 664
Equipment Use Fees ...................................... 664
To recognize eight months’ revenue from
equipment use; $996  (8/12) = $664.
31 Equipment Use Costs ......................................... 100
Deferred Initial Equipment Use Cost ............ 100
To recognize eight months’ cost of
equipment use; $150  (8/12) = $100.
31 Magazine Costs ................................................... 2
Deferred Initial Magazine Cost ...................... 2
To recognize eight months’ cost of
magazines; $3  (8/12) = $2.
Chapter 8 270
8–28. 2014 2015 2016

Installment Accounts Receivable—2014 ............. 150,000
Installment Sales .............................................. 150,000 180,000 225,000
Cost of Installment Sales* .................................... 112,500 126,000 146,250
Inventory ........................................................... 112,500 126,000 146,250
Cash† ....................................................................... 30,000 96,000 147,000
Installment Accounts Receivable—2014 ....... 30,000 60,000 30,000
Installment Accounts Receivable—2015 ....... 36,000 72,000
Installment Accounts Receivable—2016 ....... 45,000
Installment Sales ................................................... 150,000 180,000 225,000
Cost of Installment Sales ................................ 112,500 126,000 146,250
Deferred Gross Profit—2014 ........................... 37,500
Deferred Gross Profit—2014‡ ............................... 7,500 15,000 7,500
Deferred Gross Profit—2015§ ............................... 10,800 21,600
Deferred Gross Profit—2016# ............................... 15,750
Realized Gross Profit on Installment Sales ... 7,500 25,800 44,850
COMPUTATIONS:
2014 2015 2016
*$150,000  0.75 = $112,500 $180,000  0.70 = $126,000 $225,000  0.65 = $146,250
†
0.20  $150,000 = $30,000 0.40  $150,000 = $60,000 0.20  $150,000 = $30,000
0.20  $180,000 = $36,000 0.40  $180,000 = $72,000
0.20  $225,000 = $45,000
‡
$30,000  0.25 = $7,500 $60,000  0.25 = $15,000 $30,000  0.25 = $7,500
§
$36,000  0.30 = $10,800 $72,000  0.30 = $21,600
#
$45,000  0.35 = $15,750
271 Chapter 8
8–29. The key to this solution is solving the gross profit percentage for 2014 (3).
1. $39,000 ($50,000 – $11,000)
2. $11,000 ($50,000  0.22)
3. 22%: 2015 realized gross profit on 2015 cash collections, $5,000
($20,000  0.25)
2015 realized gross profit on 2014 cash collections, $5,500
($10,500 – $5,000)
Gross profit percentage—2014, 22% ($5,500/$25,000
cash collections)
4. $5,000 ($1,100/0.22)
5. $60,000 ($80,000 – $20,000)
6. $20,000 ($80,000  0.25)
7. $120,000 ($91,800 + $28,200)
8. 23.5% ($28,200/$120,000)
9. $25,275: 2016 realized gross profit on 2014 cash collections,
($10,000  0.22) $ 2,200
2016 realized gross profit on 2015 cash collections,
($50,000  0.25) 12,500
2016 realized gross profit on 2016 cash collections,
($45,000  0.235) 10,575
$25,275
Chapter 8 272
8–30. 2014 2015 2016 2017

Installment Accounts Receivable—2014 .......... 60,000
Installment Sales ........................................... 60,000 65,000 72,000 76,000
Cost of Installment Sales ................................... 27,000 31,850 31,680 32,680
Inventory ........................................................ 27,000 31,850 31,680 32,680
Cash ..................................................................... 36,000 54,000 65,450 70,100
Installment Accounts Receivable—2014 .... 36,000 15,000 6,000
Installment Accounts Receivable—2015 .... 39,000 16,250 6,500
Installment Accounts Receivable—2016 .... 43,200 18,000
Installment Accounts Receivable—2017 .... 45,600
Installment Sales ................................................ 60,000 65,000 72,000 76,000
Cost of Installment Sales ............................. 27,000 31,850 31,680 32,680
Deferred Gross Profit—2014 ........................ 33,000
Deferred Gross Profit—2014 ............................. 9,000* 15,000 6,000
†
Deferred Gross Profit—2015 ............................. 7,150 16,250 6,500
Deferred Gross Profit—2016 ............................. 11,520‡ 18,000
Deferred Gross Profit—2017 ............................. 12,920§
Realized Gross Profit .................................... 9,000 22,150 33,770 37,420
COMPUTATIONS:
‡
*$36,000 – $27,000 = $9,000 $43,200 – $31,680 = $11,520
† §
$39,000 – $31,850 = $7,150 $45,600 – $32,680 = $12,920
Gross profit recognized 2014 2015 2016 2017
Full accrual ..................................................................................................... $33,000 $33,150 $40,320 $43,320
Cost recovery method ................................................................................... 9,000 22,150 33,770 37,420
273 Chapter 8
8–31. 2014 2015 2016

Installment sales ............................................ $92,000 $103,000 $115,000*
Cost of installment sales .............................. 58,880† 62,830 74,750
Gross profit percentage ................................ 36% 39%‡ 35%
Cash collections:
2014 sales .................................................. 27,200 48,300 12,200
2015 sales .................................................. 36,600 33,280§
2016 sales .................................................. 43,450
Realized gross profit on installment sales.. 0# 16,620** 19,250††
COMPUTATIONS:
*$74,750/0.65 = $115,000
†
$92,000  0.64 = $58,880
‡
1 – ($62,830/$103,000) = 39%
§
Gross profit recognized in 2016 ........................... $19,250
All costs from 2014 sales are recovered.
Cash received equals gross profit ....................... 12,200
All costs from 2016 sales are not recovered.
Cash received goes to recover costs—gross
profit .................................................................... 0
Gross profit reported in 2016 from 2015 sales ... $ 7,050
Cost of 2015 sales.................................................. $62,830
Costs recovered in 2015........................................ 36,600
Costs to be recovered in 2016 ........................ 26,230
Cash received related to 2015 sales .................... $33,280
#
Cash collections in 2014 do not exceed cost of sales.
Realized gross profit in 2014 = $0
**Cash collections for 2014 sales
($27,200 + $48,300)....................................... $75,500
Cost of 2014 sales ............................................ 58,880
Realized gross profit in 2015 .......................... $16,620
††
Cash collections for 2014 sales ............................ $12,200
Cash collections for 2015 sales ...........................
($36,600 + $33,280)....................................... $69,880
Cost of 2015 sales ............................................ 62,830
7,050
Realized gross profit in 2016 .......................... $19,250
274 Chapter 8
PROBLEMS
8–32.
1. Project A Project B Project C Project D
2015 2016 2015 2016 2015 2016 2015 2016
(1) Contract price ........................... $ 1,450,000 $ 1,450,000 $ 1,700,000 $ 1,700,000 $ 850,000 $ 850,000 $ 1,200,000
(2) Actual cost incurred to date.... $ 840,000 $ 1,320,000 $ 720,000 $ 1,060,000 $ 160,000 $ 591,500 $ 280,000
(3) Estimated cost to complete .... 560,000 0 880,000 650,000 480,000 58,500 520,000
(4) Total estimated cost [(2) + (3)] $ 1,400,000 $ 1,320,000 $ 1,600,000 $ 1,710,000 $ 640,000 $ 650,000 $ 800,000
(5) Total estimated gross profit .... $ 50,000 $ 130,000 $ 100,000 $ (10,000) $ 210,000 $ 200,000 $ 400,000
(6) Percentage completed
[(2)/(4)] .................................... 60% 100% 45% 62% 25% 91% 35%
(7) Recognized revenue to date
[(1)  (6)] ................................. $ 870,000 $ 1,450,000 $ 765,000 $ 1,054,000 $ 212,500 $ 773,500 $ 420,000
(8) Recognized revenue
recovered in prior years ....... — 870,000 — 765,000 — 212,500 —
(9) Recognized revenue
current year [(7) – (8)] ........... $ 870,000 $ 580,000 $ 765,000 $ 289,000 $ 212,500 $ 561,000 $ 420,000
(10) Cost to date (2) ......................... $ 840,000 $ 1,320,000 $ 720,000 $ 1,064,000* $ 160,000 $ 591,500 $ 280,000
(11) Cost—prior years ..................... — 840,000 — 720,000 — 160,000 —
(12) Cost—current year [(10) – (11)] $ 840,000 $ 480,000 $ 720,000 $ 344,000 $ 160,000 $ 431,500 $ 280,000
(13) Gross profit (loss) [(9) – (12)] .. $ 30,000 $ 100,000 $ 45,000 $ (55,000) $ 52,500 $ 129,500 $ 140,000
2015 2016
Total gross profit ................................................. $ 127,500 $ 314,500
Less general and admin. expenses.................... 60,000 60,000
Net income ........................................................... $ 67,500 $ 254,500
*$1,054,000 (cumulative revenue) + $10,000 (full amount of loss) = $1,064,000
2. Completed contract—2016
Project A ............................................................................................................................................................................. $ 130,000
Project B (loss deducted in year it is determined) .......................................................................................................... (10,000)
Total income .................................................................................................................................................................... $ 120,000
General and administrative expenses .............................................................................................................................. 60,000
Income using completed-contract method ................................................................................................................... $ 60,000
Chapter 8 275
8–33.
1. a. 2013 2014 2015 2016

(1) Contract price ............. $60,000,000 $60,000,000 $60,000,000 $60,000,000
(2) Actual cost incurred
to date ....................... $12,000,000 $30,160,000 $45,000,000 $55,000,000
(3) Estimated cost to
complete ................... 38,000,000 27,840,000 10,555,555 0
(4) Total estimated cost... $50,000,000 $58,000,000 $55,555,555 $55,000,000
Percentage of
completion (2)/(4) ... 24% 52% 81% 100%
To Recognized in Recognized in
Date Prior Years Current Year
2013:
Recognized revenue
($60,000,000  0.24) .............. $14,400,000 — $ 14,400,000
Cost (actual cost)....................... 12,000,000 — 12,000,000
Gross profit ................................ $ 2,400,000 $ 2,400,000
2014:
Recognized revenue
($60,000,000  0.52) .............. $31,200,000 $14,400,000 $16,800,000
Cost (actual cost)....................... 30,160,000 12,000,000 18,160,000
Gross profit (loss)...................... $ 1,040,000 $ 2,400,000 $ (1,360,000)
2015:
Recognized revenue
($60,000,000  0.81) .............. $48,600,000 $ 31,200,000 $ 17,400,000
Cost (actual cost)....................... 45,000,000 30,160,000 14,840,000
Gross profit ................................ $ 3,600,000 $ 1,040,000 $ 2,560,000
2016:
Recognized revenue .................. $60,000,000 $ 48,600,000 $ 11,400,000
Cost ............................................ 55,000,000 45,000,000 10,000,000
Gross profit ................................ $ 5,000,000 $ 3,600,000 $ 1,400,000
2017: No gross profit recognized, only cash collection.
b. No revenue, cost, or gross profit recognized for years 2013–2015.
In 2016:
Gross revenue ......................... $60,000,000
Cost of earned revenue .......... 55,000,000
Gross profit........................... $ 5,000,000
None in 2017.
276 Chapter 8
8–33. (Concluded)
2. 2013 2014 2015 2016
Construction in Progress ................. 12,000,000 18,160,000 14,840,000 10,000,000

Materials, Labor, Cash, etc. ....... 12,000,000 18,160,000 14,840,000 10,000,000
Accounts Receivable ........................ 13,000,000 15,500,000 17,000,000 14,500,000

Construction Contracts ........... 13,000,000 15,500,000 17,000,000 14,500,000
Cash ................................................... 12,000,000 13,500,000 15,000,000 15,000,000

Accounts Receivable .................. 12,000,000 13,500,000 15,000,000 15,000,000
Cost of Long-Term Construction

Contracts ........................................ 12,000,000 18,160,000 14,840,000 10,000,000
Construction in Progress ................. 2,400,000 1,360,000 2,560,000 1,400,000
Construction Contracts ........... 14,400,000 16,800,000 17,400,000 11,400,000

Contracts ........................................ 60,000,000
Construction in Progress ........... 60,000,000
2017 Journal Entry:

Cash ................................................... 4,500,000
Accounts Receivable .................. 4,500,000
Chapter 8 277
8–34.
1. a. Percentage of Completion:
Project A Project B Project C Project D
(1) Contract price .................................... $ 420,000 $ 440,000 $500,000 $400,000
(2) Actual cost incurred to date ............. $ 340,000 $ 22,500 $390,000 $105,500
(3) Estimated cost to complete .............. 30,000 325,500 0 314,500
(4) Total estimated cost [(2) + (3)] ......... $ 370,000 $ 348,000 $390,000 $420,000
(5) Total estimated gross profit (loss)
[(1) – (4)] ......................................... $ 50,000 $ 92,000 $110,000 $ (20,000)
(6) Percentage completed [(2)/(4)] ......... 91.89% 6.47% 100% 25.12%
(7) Earned revenue in current period
[(1)  (6)] ......................................... $385,938 $ 28,468 $500,000 $100,480
(8) Cost of earned revenue in current
period (2)........................................ 340,000 22,500 390,000 120,480*
(9) Gross profit (loss) [(7) – (8)] ............. $ 45,938 $ 5,968 $110,000 $ (20,000)
*$100,480 + $20,000 loss = $120,480
b. Completed Contract:
Project C ........................................................... $500,000
Less: Cost incurred ......................................... 390,000 $110,000
Project D ........................................................... $400,000
Less: Total estimated cost .............................. 420,000 (20,000)
Total gross profit—2015 ............................... $ 90,000
2. Costs in Excess of Billings and

Billings in Excess of Costs
Under the Completed-Contract Method
a. b.
Construction Related Costs in Excess Billings in Excess
Project in Progress Billings of Billings of Costs
A $340,000 $310,000 $30,000 —
B 22,500 105,000 — $82,500
D 105,500 80,000 25,500 —
Total $468,000 $495,000 $55,500 $82,500
278 Chapter 8
8–34. (Concluded)
3. Costs and Estimated Earnings

in Excess of Billings and Billings in Excess of
Costs and Estimated Earnings
Under the Percentage-of-Completion Method
a. b.
Costs and Billings
Estimated in Excess of
Earnings in Costs and
Costs and Related Excess of Estimated
Project Estimated Earnings Billings Billings Earnings
A $385,938 $310,000 $75,938 —
B 28,468 105,000 — $76,532
D 85,500 80,000 5,500 —
Total $499,906 $495,000 $81,438 $76,532
8–35.
1. To Recognized in Recognized in
2014:
Recognized revenue
($15,000,000  0.33) .................... $ 4,950,000 — $4,950,000
Cost [($4,300,000 + $8,560,000)
 0.33] ......................................... 4,243,800 — 4,243,800
Gross profit...................................... $ 706,200 $ 706,200
2015:
Recognized revenue
($15,000,000  0.62).................... $ 9,300,000 $4,950,000 $4,350,000
Cost [($4,300,000 + $4,100,000 +
$4,700,000)  0.62]...................... 8,122,000 4,243,800 3,878,200
Gross profit...................................... $ 1,178,000 $ 706,200 $ 471,800
2016:
Recognized revenue ....................... $15,000,000 $9,300,000 $5,700,000
Cost (actual cost) ............................ 12,950,000 8,122,000 4,828,000
Gross profit ................................... $ 2,050,000 $1,178,000 $ 872,000
Chapter 8 279
8–35. (Continued)
2. 2014 2015 2016

Construction in Progress ........................ 4,300,000 4,100,000 4,550,000
Materials, Labor, Cash, etc. ............... 4,300,000 4,100,000 4,550,000
Accounts Receivable ............................... 4,000,000 5,000,000 6,000,000
Construction Contracts ................... 4,000,000 5,000,000 6,000,000
Cash ........................................................... 3,600,000 5,100,000 6,300,000
Accounts Receivable .......................... 3,600,000 5,100,000 6,300,000
Contracts ................................................ 4,243,800 3,878,200 4,828,000
Construction in Progress ........................ 706,200 471,800 872,000
Contracts ................................................ No entry No entry 15,000,000
Construction in Progress ................... 15,000,000
3. 2016: Construction in Progress ................................................................................................. 4,550,000
Materials, Labor, Cash, etc. ....................................................................................... 4,550,000
Accounts Receivable ........................................................................................................ 6,000,000
Progress Billings on Construction Contracts .......................................................... 6,000,000
Cash.................................................................................................................................... 6,300,000
Accounts Receivable .................................................................................................. 6,300,000
Cost of Long-Term Construction Contracts ................................................................... 12,950,000
Construction in Progress ........................................................................................... 12,950,000
Progress Billings on Construction Contracts ................................................................ 15,000,000
Revenue from Long-Term Construction Contracts ................................................. 15,000,000
Chapter 8 280
8–35. (Concluded)
4. The following entry would be the only one different from (2):
2014 2015 2016
Contracts ................................................ 4,300,000 4,100,000 4,550,000
8–36.
1. Building 1 Building 2 Building 3 Building 4
Prior Prior Prior
to 2015 2015 to 2015 2015 to 2015 2015 2015
a. Contract price ................................. $ 4,000,000 $ 4,000,000 $ 9,000,000 $ 9,000,000 $13,150,000 $13,150,000 $ 2,500,000
b. Actual cost incurred to date.......... $ 2,070,000 $ 3,000,000 $ 6,318,000 $ 8,118,000 $ 3,000,000 $10,400,000 $ 800,000
c. Estimated cost to complete .......... 1,380,000 750,000 1,782,000 — 9,000,000 2,800,000 1,200,000
d. Total estimated cost ..................... $ 3,450,000 $ 3,750,000 $ 8,100,000 $ 8,118,000 $12,000,000 $13,200,000 $ 2,000,000
e. Total estimated gross profit (loss)
[(a) – (d)]....................................... $ 550,000 $ 250,000 $ 900,000 $ 882,000 $ 1,150,000 $ (50,000) $ 500,000
f. Percentage of completion
[(b)/(d)] ......................................... 60% 80% 78% 100% 25% 78.79% 40%
g. Recognized revenue to date
[(a)  (f)]........................................ $ 2,400,000 $ 3,200,000 $ 7,020,000 $ 9,000,000 $ 3,287,500 $10,360,885 $ 1,000,000
h. Recognized revenue
recovered in prior periods.......... — 2,400,000 — 7,020,000 — 3,287,500 —
i. Revenue recognized in
current period.............................. $ 2,400,000 $ 800,000 $ 7,020,000 $ 1,980,000 $ 3,287,500 $ 7,073,385 $ 1,000,000
j. Cost to date (b) ............................... $ 2,070,000 $ 3,000,000 $ 6,318,000 $ 8,118,000 $ 3,000,000 $10,410,885* $ 800,000
k. Cost recognized in prior periods .. — 2,070,000 — 6,318,000 — 3,000,000 —
l. Cost recognized in current period $ 2,070,000 $ 930,000 $ 6,318,000 $ 1,800,000 $ 3,000,000 $ 7,410,885 $ 800,000
m. Gross profit (loss) [(i) – (l)] ............ $ 330,000 $ (130,000) $ 702,000 $ 180,000 $ 287,500 $ (337,500) $ 200,000
*$10,360,885 + $50,000 = $10,410,885
Chapter 8 281
8–36. (Concluded)
Prior to
2015 2015
Total revenue—all buildings .............................. $12,707,500 $ 10,853,385
Total cost—all buildings .................................... 11,388,000 10,940,885
Total gross profit—all buildings ..................... $ 1,319,500 $ (87,500)
2. Completed contract: 2015
Revenue—Building 2 .............................................. $9,000,000
Cost—Building 2 ..................................................... 8,118,000
Gross profit.............................................................. $ 882,000
Less anticipated loss on Building 3 ...................... (50,000)
Adjusted gross profit ........................................... $ 832,000
8–37.
1. 2014 2015 2016

a. Actual costs incurred to date ............... $2,800,000 $5,000,000 $5,600,000
b. Estimated cost to complete contract... 2,200,000 500,000 —
c. Total estimated cost .......................... $5,000,000 $5,500,000* $5,600,000
Percentage of completion to date
[(a)/(c)] ................................................. 56.00% 90.91% 100.00%
*Results in contract loss of $100,000.
2014—(56.00% completed):
Recognized revenue
($5,400,000  0.5600)..................... $ 3,024,000 — $3,024,000
Cost (actual cost)............................. 2,800,000 — 2,800,000
Gross profit ................................... $ 224,000 $ 224,000
2015—(90.91% completed):
Recognized revenue
($5,400,000  0.9091) .................... $4,909,140 $3,024,000 $1,885,140
Cost (recognized revenue plus
anticipated loss)............................ 5,009,140 2,800,000 2,209,140
Gross profit (loss)............................ $ (100,000) $ 224,000 $ (324,000)
2016—(100.00% completed):
Recognized revenue ........................ $5,400,000 $4,909,140 $ 490,860
Cost (actual cost)............................. 5,600,000 5,009,140 590,860
Gross profit (loss) ......................... $ (200,000) $ (100,000) $ (100,000)
282 Chapter 8
8–37. (Concluded)
2. 2014 2015 2016

Construction in Progress ........................ 2,800,000 2,200,000 600,000
Materials, Labor, Cash, etc. ............... 2,800,000 2,200,000 600,000
Actual costs incurred.
Accounts Receivable ............................... 2,600,000 2,100,000 700,000
Construction Contracts ................... 2,600,000 2,100,000 700,000
To record progress billings.
Cash ........................................................... 2,200,000 1,900,000 700,000
Accounts Receivable .......................... 2,200,000 1,900,000 700,000
To record collections on
progress billings.
Contracts ................................................ 2,800,000 2,209,140 590,860
Construction Contracts ................... 3,024,000 1,885,140 490,860
To recognize revenue and
expense for the period.
3. 2017: Cash................................................................................ 600,000

Accounts Receivable .............................................. 600,000
To record final collections on contracts.
Progress Billings on Construction Contracts ............ 5,400,000
Construction in Progress ....................................... 5,400,000
To close out construction accounts.
Chapter 8 283
8–38.
1. 2014 2015 2016 2017

Contract price ........................... $16,700,000 $16,700,000 $16,700,000 $16,700,000
Costs incurred to date ............. $ 6,400,000 $11,600,000 $15,700,000 $16,765,000
Estimated costs to complete .. 8,700,000 4,600,000 1,500,000 0
Total estimated costs .............. $15,100,000 $16,200,000 $17,200,000 $16,765,000
Total expected profit ............. $ 1,600,000 $ 500,000 $ (500,000) $ (65,000)
Percentage of completion ....... 42.38% 71.60% 91.28% 100.00%
2014:
Recognized revenue
($16,700,000  0.4238) ........................ $ 7,077,460 $7,077,460
Cost (actual cost) .................................. 6,400,000 6,400,000
Gross profit .......................................... $ 677,460 $ 677,460
2015:
Recognized revenue
($16,700,000  0.7160) ........................ $11,957,200 $ 7,077,460 $4,879,740
Cost (actual cost) .................................. 11,600,000 6,400,000 5,200,000
Gross profit (loss) ................................. $ 357,200 $ 677,460 $ (320,260)
2016:
Recognized revenue
($16,700,000  0.9128) ........................ $15,243,760 $11,957,200 $3,286,560
Cost (recognized revenue plus
entire anticipated loss) ...................... 15,743,760 11,600,000 4,143,760
Gross profit (loss) ................................. $ (500,000) $ 357,200 $ (857,200)
2017:
Recognized revenue ............................. $16,700,000 $15,243,760 $1,456,240
Cost (actual cost) .................................. 16,765,000 15,743,760 1,021,240
Gross profit (loss) ................................. $ (65,000) $ (500,000) $ 435,000
2.
2014 2015 2016 2017
Construction in Progress 6,400,000 5,200,000 4,100,000 1,065,000
Materials, Labor,
Cash, etc. .................. 6,400,000 5,200,000 4,100,000 1,065,000
Cost of Long-Term
Contracts ...................... 6,400,000 5,200,000 4,143,760 1,021,240
Construction in Progress 677,460 320,260 857,200 435,000
Revenue from Long-
Term Contracts......... 7,077,460 4,879,740 3,286,560 1,456,240
284 Chapter 8
8–39.
2015 Inventory.............................................................................. 45,200

Cash ............................................................................... 45,200
Notes Receivable—2015 ($32,000 + $62,000 + $3,600) ... 97,600
Unearned Interest Revenue ($7,167 + $3,600) ........... 10,767
Installment Sales ........................................................... 86,833
Cost of Installment Sales ($45,200 – $2,000 inventory
increase) ........................................................................... 43,200
Inventory ........................................................................ 43,200
Cash ..................................................................................... 35,600
Notes Receivable—2015............................................... 35,600
Unearned Interest Revenue—2015 ................................... 3,600
Interest Revenue ........................................................... 3,600
Installment Sales ................................................................ 86,833
Cost of Installment Sales ............................................. 43,200
Deferred Gross Profit on Installment Sales—2015 .... 43,633
Deferred Gross Profit on Installment Sales—2015 ......... 16,080*
Realized Gross Profit on Installment Sales ................ 16,080
*Gross profit percentage: 50.25% ($43,633/$86,833);
0.5025  $32,000 = $16,080
2016 Inventory.............................................................................. 52,020
Cash ............................................................................... 52,020
Notes Receivable—2016 .................................................... 89,500*
Unearned Interest Revenue ......................................... 11,955‡
Installment Sales ........................................................... 77,545
*$60,000 + ($50,000 + $5,500) – $26,000† = $89,500
†
2015 Notes receivable collected in 2016.
‡
Interest revenue from 2015 notes: $7,167 – $5,579 = $1,588
Interest revenue from 2016 notes: $5,500 – $1,588 = $3,912
Unearned interest revenue at end of 2016 ...................... $ 8,043
Interest revenue from 2016 notes (see above) ............... 3,912
Total unearned interest revenue at time of sale............. $11,955
Cost of Installment Sales ($52,020 – $8,000) ................... 44,020

Inventory ........................................................................ 44,020
Cash ..................................................................................... 55,500
Notes Receivable—2015 ($62,000 – $36,000) ............. 26,000
Notes Receivable—2016............................................... 29,500§
§
$89,500 – $60,000 = $29,500
Chapter 8 285
8–39. (Concluded)
Unearned Interest Revenue—2015 ......................................... 1,588

Unearned Interest Revenue—2016 ......................................... 3,912
Interest Revenue ................................................................ 5,500
Installment Sales ...................................................................... 77,545
Cost of Installment Sales................................................... 44,020
Deferred Gross Profit on Installment Sales—2016 ......... 33,525
Deferred Gross Profit on Installment Sales—2015
($26,000 – $1,588 = $24,412; $24,412  0.5025)................ 12,267
Deferred Gross Profit on Installment Sales—2016 ............... 11,062*
Realized Gross Profit on Installment Sales ..................... 23,329
*Gross profit percentage: 43.23% ($33,525/$77,545);
0.4323  ($29,500 – $3,912) = $11,062
8–40.
2014 2015 2016

Installment A/R—2014 ................. 124,000
Installment A/R—2015 ................. 138,000
Installment A/R—2016 ................. 145,000
Installment Sales .................... 124,000 138,000 145,000
Cost of Installment Sales ............ 79,360 84,180 89,900
Inventory ................................. 79,360 84,180 89,900
Cash .............................................. 66,400 122,150 148,900
Installment A/R—2014 ........... 59,300 38,200 18,500
Installment A/R—2015 ........... 65,400 33,700
Installment A/R—2016 ........... 73,450
Interest Revenue .................... 7,100 18,550 23,250
Installment Sales .......................... 124,000 138,000 145,000
Cost of Installment Sales ...... 79,360 84,180 89,900
Deferred Gross Profit—2014 44,640
† §
Deferred Gross Profit—2014 ....... 21,348* 13,752 6,660
Deferred Gross Profit—2015 ....... 25,506‡ 13,143#
Deferred Gross Profit—2016 ....... 27,911**
Realized Gross Profit ............. 21,348 39,258 47,714
*$59,300  0.36 = $21,348
†
$38,200  0.36 = $13,752
‡
$65,400  0.39 = $25,506
§
$18,500  0.36 = $6,660
#
$33,700  0.39 = $13,143
**$73,450  0.38 = $27,911
286 Chapter 8
8–41.
1. a. Percentage of completion
Period 1 Period 2 Period 3 Period 4
(1) Contract price ........................... $4,500,000 $4,500,000 $4,500,000 $4,500,000
(2) Actual costs incurred to date .. $ 900,000 $2,100,000 $3,180,000 $3,600,000
(3) Estimated cost to complete
contract .................................... 2,700,000 1,500,000 420,000 0
(4) Total estimated cost ................. $3,600,000 $3,600,000 $3,600,000 $3,600,000
(5) Total expected profit ................ $ 900,000 $ 900,000 $ 900,000 $ 900,000
Percentage of completion to date

[(2)/(4)] ............................................... 25.0000% 58.33333% 88.33333% 100.0000%
Period 1:
2015—(25.00000% completed)
Recognized revenue
($4,500,000  0.2500000) .............. $1,125,000 — $1,125,000
Cost (actual cost) ............................ 900,000 — 900,000
Gross profit...................................... $ 225,000 $ 225,000
Period 2:
2015—(58.33333% completed)
Recognized revenue
($4,500,000  0.5833333)................. $2,625,000 $1,125,000 $1,500,000
Cost (actual cost) ............................ 2,100,000 900,000 1,200,000
Gross profit...................................... $ 525,000 $ 225,000 $ 300,000
Period 3:
2016—(88.33333% completed)
Recognized revenue
($4,500,000  0.8833333) .............. $3,975,000 $2,625,000 $1,350,000
Cost (actual cost) ............................ 3,180,000 2,100,000 1,080,000
Gross profit...................................... $ 795,000 $ 525,000 $ 270,000
Period 4:
2016—(100.00000% completed)
Recognized revenue ....................... $4,500,000 $3,975,000 $ 525,000
Cost .................................................. 3,600,000 3,180,000 420,000
Gross profit ................................... $ 900,000 $ 795,000 $ 105,000
Chapter 8 287
8–41. (Concluded)
b. Completed contract
Periods 1, 2, and 3—No revenue, costs, or gross profit.
Period 4:
Revenue ............................................. $4,500,000
Costs .................................................. 3,600,000
Gross profit........................................ $ 900,000
c. Installment sales
Anticipated revenues ................................................... $4,500,000
Anticipated costs .......................................................... 3,600,000
Anticipated gross profit ............................................... $ 900,000
Gross profit percentage ............................................... 20%
Gross Profit
Period 1—0.20  $750,000 ............................................ $150,000
Period 2—0.20  $1,050,000 ......................................... 210,000
Period 3—0.20  $1,950,000 ......................................... 390,000
Period 4—0.20  $750,000 ............................................ 150,000
$900,000
d. Cost recovery
Estimated costs: $3,600,000
Payment Costs to Be Gross
Period Received Recovered Profit
$3,600,000
1 $ 750,000 2,850,000 $ 0
2 1,050,000 1,800,000 0
3 1,950,000 0 150,000
4 750,000 0 750,000
Summary of Gross Profit under

Four Different Revenue Recognition Methods
Method Period 1 Period 2 Period 3 Period 4
Percentage of completion ................. $225,000 $300,000 $270,000 $105,000
Completed contract ........................... — — — 900,000
Installment sales ................................ 150,000 210,000 390,000 150,000
Cost recovery ..................................... — — 150,000 750,000
2. Because the probability of collection is high for most municipalities, the

percentage-of-completion method would best reflect the gross profit in this case.
As the uncertainty of the contract increases, either as to payment by the pur-
chaser or as to future costs, methods that defer recognition of gross profit until
later would be preferred. If only collection is doubtful, the installment sales
method is recommended. If the future costs are uncertain, either the cost recov-
ery or the completed-contract method is recommended.
288 Chapter 8
8–42.
1. The correct answer is a. To calculate the income in the fourth and final year of a
contract accounted for by the percentage-of-completion method, the total profit
would first be calculated by comparing the contract price to actual total costs.
The amount would then be reduced by the income previously recognized to give
the amount to be recognized in the fourth year.
2. The correct answer is d. A nonrefundable lease bonus should be recognized as

revenue over the lease term. The receipt of the lease bonus creates deferred rev-
enue.
Chapter 8 289
CASES
Discussion Case 8–43
This case is designed to contrast the point of revenue recognition with respect to the completed-contract
method of accounting and the percentage-of-completion method. The discussion should focus on the ap-
propriateness and advantages and disadvantages of each method in terms of reporting a realistic income
figure.
The previous accountant’s policy of deferring all expenses and revenues to the period of completion con-
forms to the concept that revenue is not recognized until an actual exchange has taken place. The argu-
ment is that revenue emerges from sales, not production. Actually, revenue is earned continuously. The
question is when to recognize it. If there are significant uncertainties involved as to the actual sales price
or collectibility, the completed-contract method followed by the previous accountant has merit.
By contrast, the percentage-of-completion method recognizes revenues as they are earned over the peri-
od of the projects instead of at completion. This method is acceptable, and generally preferable, when a
firm contract for a sale exists, and the costs remaining to be incurred on the project can be estimated with
reasonable accuracy.
This case can be used to discuss the rationale underlying percentage-of-completion accounting and to
explore areas not specifically included in the identified questions. It should be emphasized that the tax
method used does not have to coincide with the book method and that the completed-contract method is
available for tax purposes with some limitations. Income tax allocation procedures would be necessary if
the methods do not agree. This topic is covered in a later chapter. The requirement to recognize losses
entirely in the period when first identified is the same regardless of the accounting method used. It is
based on the valuation principle that inventory should not be valued at more than its net realizable value.
If the costs to date plus expected future costs exceed the contract price, the excess must be deducted
from the cost incurred to date if the net realizable value principle is to be followed. Discussion could in-
clude rationale for this approach, including the historical tendency to be conservative in applying the
percentage-of-completion method. The discussion could also focus on the uncertainty that often arises
when applying this method and the extreme care that is necessary in computing the percentage of com-
pletion and the estimation of future costs.
This case can be used to introduce the very difficult revenue recognition problems that face companies in
service industries. The membership fee should not be recognized immediately because there has not
been substantial completion of the earnings process. In addition, no separate chunk of revenue should be
allocated to the initial sign-up process and recognized immediately because customers are not willing to
pay merely to be signed up for a membership; they are paying the initial fee to receive future membership
services. Instead, the membership fee should be recognized on a straight-line basis for the economic life
of the agreement. A very difficult question is whether some of the initial fee revenue should be separately
deferred and allocated to the special courses and programs that a customer is expected to take, at a dis-
count, during the term of the membership. Doing this would require reliable historical data on which to
base the estimates.
290 Chapter 8
Discussion Case 8–45 (Concluded)
This case is based on the experience of an actual company. In the actual case situation, the studios rec-
ognized the entire membership fee as revenue at the time of the initial contract. Little or no provision was
made for future membership services. In the initial promotion, memberships were sold easily to those
most interested in the services rendered by such institutions. This made the revenue and income for new-
ly opened studios high. As the particular studios matured and settled into more normal operations, the
revenue and income slowed down to a more stable state. The overall company statements continued to
show increasing revenue and income by opening new studios at an accelerated rate. This had its eventu-
al limits. The sale of the company was near completion when the impact of these facts was understood by
the prospective purchaser. Preparation of revised statements disclosed the real conditions existing and
led to a withdrawal, with penalty, of the offer to buy. Although not part of the revenue recognition problem,
further analysis indicated that some mortgages, especially second mortgages, had not been properly rec-
orded, which added to the unattractiveness of the studios to potential buyers.
This case provides a basis for a class discussion on the difficulty of being precise in determining when
revenue is to be recognized. The following points concerning each of the four methods enumerated in the
case will be helpful in conducting a discussion of this case.
Method 1: Recognize revenue when advance billing is made.
Strengths
The advertising contract stresses the development of the advertising copy as a principal service. Because
of past experience, it apparently has been possible to estimate the costs to develop the copy, the media
cost, and possible loss from uncollectible accounts at the time the contract is signed.
The critical event under this revenue recognition method is signing the contract. Adjustments to the esti-
mates are small, and thus a very early revenue recognition point is possible.
Weaknesses
The revenue recognition criteria state that there should be substantial performance of all services before
revenue is recognized. At the signing of the contract, the service to be performed is still in the future. Be-
ing able to estimate costs is only one of the prerequisites for revenue recognition. Accurate past esti-
mates do not guarantee accurate future estimates. It is unacceptable to recognize revenue for services to
be rendered on the basis of only a signed contract.
Method 2: Recognize revenue when payment is received from the client.
Strengths
The receipt of payment from the client adds one objective dimension to recognizing revenue. One less
item must be estimated: the possible uncollectible accounts. Receipt of cash in this case assures the
agency that the contract is firm and that there is no misunderstanding as to the contractual payment
terms.
Weaknesses
Depending on what services are performed before the payment is received, this method has many of the
same weaknesses as the first method. There is not necessarily a connection between the timing of cash
receipts and the performance of advertising services. The services may be substantially performed prior
to cash collection, in which case collection may be too late to properly recognize revenue. On the other
hand, collection may be made before the services are rendered, in which case cash collection is too
early.
Chapter 8 291
Discussion Case 8–46 (Concluded)
Method 3: Recognize revenue in the month when advertising appears in the media.
Strengths
By the time the advertisement appears in the media, there is no doubt that the agency has delivered the
contracted services. The advertisement has been designed and has been placed in the media. This point
of revenue recognition is more closely aligned with traditional revenue recognition practices. Students
who like to follow a majority position will probably favor this method.
Weaknesses
Even though services have been rendered, there is still uncertainty as to the cost of the media services.
This may or may not be serious, depending on the variability and predictability of the media costs. Con-
tingent on payment timing, bad debt expense may still have to be estimated under this method.
Method 4: Recognize revenue when the bill for advertising is received from the media.
Strengths
At this point, all costs and revenues should be known in amount, and revenue recognition should be free
of estimates and uncertainties, especially if the client paid the advance billing as has been the practice.
This method should lead to high verifiability of the revenue and cost to be reported.
Weaknesses
This method may defer recognition of revenue too far beyond the critical performance of services. The
revenue recognition principle does not require 100% certainty before revenue and costs are recognized.
Income statements should reflect the efforts expended in the period of reporting, not in some later period
when all uncertainties are resolved. Estimates and judgments must be applied to enhance relevance and
timeliness.
It is usually interesting to have students vote for their preference after all four methods have been dis-
cussed. This case could also be used in a debate format. One or more students could defend each meth-
od, and the class could then identify the most convincing presentation.
This case illustrates that the use of differing revenue recognition methods can affect materially a firm’s
reported performance. When the uncertainty of cash collection is high and there is little penalty to the cus-
tomer when default occurs, revenue recognition may be more appropriate at the point of cash collection
rather than at the point of sale.
In this case, there appears to be substantial doubt as to the collectibility of receivables. If 1 in 5 sales
dollars is not being collected, it appears the earnings process is not complete at the point of sale. While it
is unfortunate that the restated financial statements result in a significantly lower net income, the inde-
pendent auditor has a responsibility to the users of the financial statements to ensure that those financial
statements accurately reflect the financial position of the company.
292 Chapter 8
1. For money received by the home office from test centers, the journal entry to book the receipt of cash
as revenue would be:
Cash ............................................................ XXX
Revenue ................................................ XXX
However, if that money was subsequently “churned” back to the test site, a second journal entry
would have to be made. The credit would be to Cash, and the debit should be made to a receivable
account. Any subsequent receipts of cash from the test center would then have to be analyzed to de-
termine if the cash is revenue or a repayment of the receivable. One can see that if “churning” is oc-
curring, the receivables account will continue to increase as revenue increases.
2. If the test center site transferring the money has an established receivable with the home office, the
accountant at the home office would have to determine if the money received was a payment on the
receivable or the recognition of revenue. The answer would depend on supporting documentation.
However, if the remittances increase and no payments are being made to reduce the receivable, then
the accountant at the home office should begin to question why loans are not being repaid.
This case examines the issue of shipping inventory in anticipation of an order. The revenue recognition
criteria require the customer to provide an asset (an accounts receivable) in order for revenue to be real-
izable. In the instance where the customer has not ordered the inventory, it would be difficult to claim that
the customer has provided an asset. The situation could be different if the customer has issued an open
purchase order to Datarite. In this case, Datarite could argue that an open purchase order results in an
accounts receivable once inventory is shipped. Such an arrangement should be very carefully scrutinized
by the company’s auditor.
If the company president includes the extra inventory shipments as revenue, then the debt covenants will
be satisfied. Thus, in this instance, the existence of debt covenants will have resulted in the company’s
performing business activities only to satisfy debt restrictions. If the sales are subsequently returned by
dealers, the company will have, in effect, violated its debt covenants but will have avoided disclosing this
fact to debt holders.
The sales being made by Rain-Soft are in reality consignments and, as such, are not generally recog-
nized as sales until they have been sold to an outside party. This case is an example of a situation in
which a transaction might be labeled a sale but the terms of the side agreements between the “seller” and
the “buyer” convert the transaction into a consignment arrangement. Using past experience as a guide is
risky because a change in economic conditions can make past experience irrelevant to actual experience.
Class discussion could focus on the legal differences between a consignment sale to a dealer, who is in
reality an agent of the selling company, and an actual arm’s-length sale. Uncertainties, such as the prob-
ability of cash collection and the possibility of return, still exist in arm’s-length sales, but a presumption
exists under these conditions that an exchange has taken place and the revenue can be recognized. A
change in accounting policy is probably required in the case as described for the company to be keeping
its records in accordance with GAAP.
Chapter 8 293
Case 8–51
1. Revenue Recognition (from Note 2 Summary of Significant Accounting Policies)

Broadcast advertising revenues are recognized when commercials are aired. Revenues from televi-
sion subscription services related to the Company’s primary cable programming services are recog-
nized as services are provided. Certain of the Company’s existing contracts with cable and satellite
operators include annual live programming commitments. In these cases, recognition of revenues
subject to the commitments is deferred until the annual commitments are satisfied, which generally
results in higher revenue recognition in the second half of the year.
Revenues from advance theme park ticket sales are recognized when the tickets are used. For non-
expiring, multi-day tickets, we recognize revenue over a three-year time period based on estimated
usage, which is derived from historical usage patterns.
Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are
exhibited. Revenues from video and video game sales, net of anticipated returns and customer incen-
tives, are recognized on the date that video units are made available for sale by retailers. Revenues
from the licensing of feature films and television programming are recorded when the material is
available for telecast by the licensee and when certain other conditions are met.
Merchandise licensing advances and guarantee royalty payments are recognized based on the con-
tractual royalty rate when the licensed product is sold by the licensee. Non-refundable advances and
minimum guarantee royalty payments in excess of royalties earned are generally recognized as reve-
nue at the end of the contract term.
Revenues from our internet and mobile operations are recognized as services are rendered. Advertis-
ing revenues at our internet operations are recognized when advertisements are viewed online.
Taxes collected from customers and remitted to governmental authorities are presented in the Con-
solidated Statements of Income on a net basis.
2. One possibility would be when the videos and video games were shipped to retailers and a promise
of payment was received from retailers.
3. One possibility would be when Disney contracted with theaters to release the motion picture and the
theaters gave a promise to pay for the right to exhibit the motion picture. However, until the movie is
exhibited, the promised service has not been delivered by Disney.
Case 8–52
1. Siskon recognizes revenue from its gold operations when it pours the gold—not when the gold is
sold. This is an exception to the general rule of revenue recognition, but it is acceptable because of
the readily available market for gold.
2. This method of revenue recognition might be a problem if the market for gold were highly volatile. As
long as the price of gold is fairly stable, this method of revenue recognition should result in a fairly
stated picture of a firm’s income.
3. If the market for gold were to suddenly drop and gold went from selling for $1,600 an ounce to $1,200
an ounce, then revenues could be greatly overstated.
294 Chapter 8
Case 8–53
1. Ben & Jerry’s recognizes revenue on its ice cream when the product is shipped.
2. Ben & Jerry’s sells two different types of franchises. The first is a franchise for an individual store, and
the second is a franchise for a geographical area. Revenue from franchise fees for an individual store
is recognized when the services outlined in the franchise agreement have been substantially per-
formed and the store has opened for business. Revenue relating to area franchises is recognized
based on the proportion of the number of stores opened in the geographical area relative to the
number of stores expected to be opened.
Case 8–54
1. Lockheed measures the percentage of a contract completed using achievement of performance

milestones or the cost-to-cost method. When the cost-to-cost method is used, revenues and profits
are recorded based on the ratio of costs incurred to estimated total costs—just as is illustrated in the
chapter.
2. For cost-reimbursed-type contracts, costs are recorded as incurred, and profits are estimated and
included based on a cost-to-cost-type estimate.
3. If changes are made to long-term contracts, those changes are reflected in the current and future pe-
riods. Prior-period financial statements are not restated.
4. The company generally records revenue from these types of service contracts using the straight-line
method over the life of the contract.
5. While the company uses the straight-line method to record revenue on these service contracts, costs
are expensed as incurred. The one exception is that initial setup costs are capitalized and recognized
over the life of the contract.
Case 8–55
Students should address the following issues as they deal with this revenue recognition assignment:
1. Has the electronics retailer substantially completed its part of the revenue recognition process?
2. Has the electronics retailer received a valid promise of payment?
3. If the electronics retailer has received a valid promise, should it include the entire selling price as rev-
enue in the period of the sale, or should part of the selling price be allocated to interest and recog-
nized over time?
Ford Motor Company disclosed the following about the accounting for its 0.0% financing
program: “Costs for customer and dealer cash incentives and costs for special financing
and leasing programs that we sponsor through Ford Credit (e.g., 0.0% financing pro-
gram) are recognized as sales reductions at the later of the date the related vehicle sales
are recorded or at the date the incentive program is both approved and communicated. In
general, the amount of financing cost that we provide to Ford Credit is the difference be-
tween the amounts offered to retail customers and a market-based interest or lease rate.”
Chapter 8 295
Case 8–56
The point of this exercise is to drive home the two basic revenue recognition criteria—realizability and
substantial completion. For most companies, the substantial completion criterion is not satisfied until the
point of sale because significant effort must occur to sell the product. Because gold is a commodity and
has a rather sophisticated market associated with it, the substantial completion criterion has been deter-
mined to be satisfied when the gold has been mined and processed and is ready for sale. But prior to this
point, substantial completion has not been achieved.
As a result of this case, students should realize that events can occur, over which a firm may have no
control, that can significantly affect the firm’s financial performance.
Case 8–57
Solutions to this problem can be found on the Instructor’s Resource CD-ROM or downloaded from the
Web at www.cengagebrain.com.

Revenue Recognition and Construction Contract Accounting Questions

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CHAPTER 8

1. The two general revenue recognition crite- distinct elements of a multiple-element

expected to be expended. They include la- anticipated, and as expectations of future

PRACTICE 8–1 BASIC JOURNAL ENTRIES FOR REVENUE RECOGNITION

1. Cash ......................................................................................... 1,000

2. Unearned Service Revenue ................................................... 1,000

PRACTICE 8–2 REVENUE IN A MULTIPLE-ELEMENT ARRANGEMENT UNDER

Equipment delivery = $280,645 = $300,000 × [$290,000/($290,000 + $20,000)]

PRACTICE 8–3 REPORTING REVENUE GROSS AND NET

1. Accounts Receivable ($400,000  0.03) ................................ 12,000

2. Cash ......................................................................................... 400,000

PRACTICE 8–4 COST-TO-COST METHOD

1. Percentage of completion: [$100,000/($100,000 + $450,000)] = 18.182%

PRACTICE 8–4 (Concluded)

2. Percentage of completion: [($100,000 + $150,000)/($100,000 + $150,000 +

3. Percentage of completion: 100.000%

PRACTICE 8–5 EFFORTS-EXPENDED METHOD

1. Percentage of completion: [150/(150 + 850)] = 15.000%

2. Percentage of completion: [(150 + 300)/(150 + 300 + 520)] = 46.392%

3. Percentage of completion: 100.000%

PRACTICE 8–6 PERCENTAGE OF COMPLETION BASED ON OUTPUT MEASURES

1. Percentage of completion: [3,000/(3,000 + 15,200)] = 16.484%

PRACTICE 8–6 (Concluded)

2. Percentage of completion: [(3,000 + 7,500)/(3,000 + 7,500 + 8,200)] = 56.150%

3. Percentage of completion: 100.000%

PRACTICE 8–7 BASIC CONSTRUCTION JOURNAL ENTRIES

1. Construction in Progress ....................................................... 100,000

2. Construction in Progress ....................................................... 150,000

3. Construction in Progress ....................................................... 250,000

PRACTICE 8–8 COMPLETED-CONTRACT JOURNAL ENTRIES

Progress Billings ............................................................................. 880,000

PRACTICE 8–9 PERCENTAGE-OF-COMPLETION JOURNAL ENTRIES

1. Cost of Construction Contracts ............................................ 100,000

2. Cost of Construction Contracts ............................................ 150,000

3. Cost of Construction Contracts ............................................ 250,000

PRACTICE 8–10 CONSTRUCTION CONTRACTS: BALANCE SHEET REPORTING

1. Accounts receivable is reported as a current asset. The balance at the end of

PRACTICE 8–10 (Concluded)

No net amount is reported because both Construction in Progress and Pro-

PRACTICE 8–11 MULTIPLE YEARS OF REVENUES AND COSTS: COST-TO-COST

1. Percentage of completion: [$280,000/($280,000 + $760,000)] = 26.9231%

2. Percentage of completion: [($280,000 + $390,000)/($280,000 + $390,000 +

PRACTICE 8–11 (Concluded)

3. Percentage of completion: 100.000%

PRACTICE 8–12 MULTIPLE YEARS OF REVENUES AND COSTS: OUTPUT MEASURE

1. Percentage of completion: [9,800/(9,800 + 20,300)] = 32.5581%

2. Percentage of completion: [(9,800 + 10,200)/(9,800 + 10,200 + 10,000)] =

PRACTICE 8–12 (Concluded)

3. Percentage of completion: 100.0000%

PRACTICE 8–13 MULTIPLE YEARS OF REVENUES AND COSTS: ANTICIPATED

1. Percentage of completion: [$200,000/($200,000 + $1,150,000)] = 14.8148%

PRACTICE 8–13 (Concluded)

3. Percentage of completion: 100.0000%

PRACTICE 8–14 JOURNAL ENTRIES FOR THE PROPORTIONAL PERFORMANCE

1. Cash (1,900  $600) ................................................................ 1,140,000

2. Deferred Initial Season Ticket Costs .................................... 180,000

3. Unearned Season Ticket Revenue ........................................ 435,273

PRACTICE 8–15 INSTALLMENT SALES: BASIC JOURNAL ENTRIES

Installment Accounts Receivable .................................................. 350,000

PRACTICE 8–15 (Concluded)

Deferred Gross Profit ...................................................................... 28,000

PRACTICE 8–16 INSTALLMENT SALES: FINANCIAL STATEMENT REPORTING