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Tanner Furniture Company concluded its FIRST year of operations in
which it made sales of $1,500,000, ALL on installment. Collections
during the year from down payments and installments totaled
$600,000. Purchases for the year totaled $900,000; the cost of
merchandise on hand at the end of the year was $180,000.
INSTRUCTIONS
Using the installment-sales method, make summary entries to record:
(a) the installment sales and cash collections;
(b) the cost of installment sales;
(c) the unrealized gross profit;
(d) the realized gross profit.
6. On February 1, 2003, Miley Contractors agreed to construct a
building at a contract price of $5,600,000. Miley estimated total
construction costs would be $4,000,000 and the project would be
finished in 2005. Information relating to the costs and billings for
this contract is as follows:
2003 2004 2005
—————————— ———— ————
Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
Estimated costs
to complete 2,500,000 1,760,000 -0-
Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
INSTRUCTIONS
Fill in the correct amounts on the following schedule. For
percentage-of-completion accounting and for completed-contract
accounting, show the gross profit that should be recorded for 2003,
2004, and 2005.
Percentage-of-Completion Completed-Contract
—————————————————— ———————————————
Gross Profit Gross Profit
———————————— ————————————
2003 ____________ 2003 ____________
2004 ____________ 2004 ____________
2005 ____________ 2005 ____________
————————-
Section 3.Problems
7. Cherry Construction specializes in the construction of commercial
and industrial buildings. The contractor is experienced in bidding
long-term construction projects of this type, with the typical
project lasting fifteen to twenty-four months. The contractor uses
the percentage-of-completion method of revenue recognition since,
given the characteristics of the contractor’s business and con-
tracts, it is the most appropriate method. Progress toward comple-
tion is measured on a cost to cost basis. Cherry began work on a
lump-sum contract at the beginning of 2004. As bid, the statistics
were as follows:
Lump-sum price (contract price) $4,000,000
Estimated costs
Labor $ 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000
———————— ——————
$1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 414,000
Materials and subcontractor 1,098,000
Indirect costs 150,000 1,662,000
————————
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date
were standard electrical and mechanical materials stored on the job
site, but not yet installed, costing $102,000. These costs should
not be considered in the costs incurred to date.
INSTRUCTIONS
(a) Compute the percentage of completion on the contract at the end
of 2004.
(b) Indicate the amount of gross profit that would be reported on
this contract at the end of 2004.
(c) Make the journal entry to record the income (loss) for 2004 on
Cherry’s books.
(d) Indicate the account(s) and the amount(s) that would be shown on
the balance sheet of Cherry Construction at the end of 2004
related to its construction accounts. Also indicate where these
items would be classified on the balance sheet. Billings
collected during the year amounted to $1,960,000.
(e) Assume the latest forecast on total costs at the end of 2004 was
$4,100,000. How much income (loss) would Cherry report for
the year 2004?
