Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries. While the majority of its revenues are recognized at point of sale, Nomar appropriately recognizes revenue long-term construction contracts using the percentage-complete method. It recognizes sales of some properties using the installment-sales approach. Income data for 2013 from operations other than construction and real estate are as follows:
Revenues 5,500,000
Expenses 4,200,000
1. Nomar started a construction project during 2012. The total contract price is 500,000, and 100,000 in costs were incurred in 2013. Estimated costs to complete the project in 2014 are 200,000. In 2012 Nomar incurred 100,000 of costs and recognized 25,000 gross profit on this project. Total billings at the end of 2013 were 230,00, and total cash collected as the end of 2013 was 202,500.
2. During this year, Nomar sold real estate parcels at a price of 480,000. Nomar recognizes gross profit at an 18% rate when cash is received. Nomar collected 220,000 during the year on these sales.
Solve
A) Determine net income for Nomar for 2013. Ignore income taxes.
B) Prepare the journal entries to record the costs incurred and gross profit recognized in 2013 on the construction project.
C) For 2013, show how the details related to this construction contract would be disclosed on the balance sheet.
D) Nomar is negotiating real estate sales with some new customers which are more uncertain as to the customers’ ability to make all payments. Is there a more appropriate revenue recognition policy for these customers? Explain.
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