On March 1, 2007, Winter Company entered into a contract to build an apartment building

On March 1, 2007, Winter Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000 The information that follows pertains to the construction period:

2007 2008 2009
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 390,000 0
Progress billing to date: 1,050,000 2,100,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,750,000

Instructions:
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2009.
(c) Prepare a partial balance sheet for December 31, 2008, showing the balances in the receivables and inventory accounts.


Click here for the solution: On March 1, 2007, Winter Company entered into a contract to build an apartment building

On March 1, 2010, Chance Company entered into a contract to build an apartment building

P18-3 (Recognition of Profit and Entries on Long-Term Contract) On March 1, 2010, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period:

2010 2011 2012
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 520,000 0
Progress billing to date: 1,050,000 2,000,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,850,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2012.
(c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.


Click here for the solution: On March 1, 2010, Chance Company entered into a contract to build an apartment building

The Pyramid Construction Company has used the completed-contract method of accounting for construction contracts

P 20-2 Change in principle; change in method of accounting for long-term construction

The Pyramid Construction Company has used the completed-contract method of accounting for construction contracts during its first two years of operation, 2009 and 2010. At the beginning of 2011, Pyramid decided to change to the percentage-of-completion method for both tax and financial reporting purposes. The following table presents information concerning the change for 2009–2011. The income tax rate for all years is 40%.

Pyramid issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2010 and 2011.

Required:
1. Prepare the journal entry to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.)
2. Prepare the 2011–2010 comparative income statements beginning with income before income taxes.
3. Prepare the 2011–2010 comparative statements of shareholders' equity. (Hint: The 2009 statements reported retained earnings of $36,000. This is $60,000 − [$60,000 × 40%].


Click here for the solution: The Pyramid Construction Company has used the completed-contract method of accounting for construction contracts

On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment

On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment. Under the terms of the agreement, the equipment may be purchased now or Mason may wait until January 10, 2011, to make the purchase. The cost of the equipment is $400,000. It will be financed by a note bearing interest at the market rate. Straight-line depreciation over a 10-year life will be used for book purposes. A double-declining balance over seven years will be used for tax purposes. (One-half year of depreciation will be taken in the year of purchase regardless of the date of purchase.)

Required:
a. Discuss the financial statement impacts of postponing the purchase of the equipment. Would the market price of the firm’s common stock be affected by any or all of these impacts? Do not assume in your discussion that the postponement will affect revenues or any operating costs other than depreciation.
b. Discuss any cash flow impacts related to postponing the purchase of the equipment.
c. Efficient markets assume that stockholder wealth is affected by the amount and timing of cash flows. Which alternative is more favorable to them: purchasing before year-end or waiting until January? Explain your answer.


Click here for the solution: On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment

Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010

Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010, to construct a four-story office building. At that time, Monat estimated that it would take between 2 and 3 years to complete the project. The total contract price for construction of the building is $4,400,000. Monat appropriately accounts for this contract under the completed-contract method in its financial statements and for income tax reporting. The building was deemed substantially completed on December 31, 2012. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to the Hyatt Clinic under the contract are shown below.

(a) Prepare schedules to compute the amount to be shown as “Cost of uncompleted contract in excess of related billings” or “Billings on uncompleted contract in excess of related costs” at December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
(b) Prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.


Click here for the solution: Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010

During 2010 Nilsen Company started a construction job with a contract price of $1,600,000

E18-4 (Recognition of Profit on Long-Term Contracts) During 2010 Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2012. The following information is available.

2010 2011 2012
Costs incurred to date $400,000 $825,000 $1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2011.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

Click here for the solution: During 2010 Nilsen Company started a construction job with a contract price of $1,600,000

In 2010, Steinrotter Construction Corp. began construction work under a 3-year contract

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2010, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2010, follow.

Balance Sheet
Accounts receivable-construction contract billings $18,000
Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500

Income Statement
Income (before tax) on the contract recognized in 2010 $19,500

Instructions
(a) How much cash was collected in 2010 on this contract?
(b) What was the initial estimated total income before tax on this contract?

Click here for the solution: In 2010, Steinrotter Construction Corp. began construction work under a 3-year contract

On July 1, 2010, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000

P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2010, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2012, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2010, 2011, and 2012.

At At At
12/31/10 12/31/11 12/31/12
Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000
Estimated costs to complete the contract 1,200,000 800,000 –0–
Billings to Gumbel 300,000 1,100,000 1,850,000

Instructions
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.)

Click here for the solution: On July 1, 2010, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000

Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year

Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year. On August 18, 1990, shortly before the start of the school year, Cantu hand-delivered to her supervisor a letter of resignation, effective August 17, 1990. In this letter, Cantu requested that her final paycheck be forwarded to an address in McAllen, Texas, some 50 miles from the San Benito office where she tendered the resignation. The San Benito superintendent of schools, the only official authorized to accept resignations on behalf of the school district, received Cantu’s resignation on Monday, August 20. The superintendent wrote a letter accepting Cantu’s resignation the same day and deposited the letter, properly stamped and addressed, in the mail at approximately 5:15 PM that afternoon. At about 8:00 AM the next morning, August 21, Cantu hand-delivered to the superintendent’s office a letter withdrawing her resignation. This letter contained a San Benito return address. In response, the superintendent hand-delivered that same day a copy of his letter mailed the previous day to inform Cantu that her resignation had been accepted and could not be withdrawn. The dispute was taken to the state commissioner of education, who concluded that the school district’s refusal to honor Cantu’s contract was lawful, because the school district’s acceptance of Cantu’s resignation was effective when mailed, which resulted in the formation of an agreement to rescind Cantu’s employment contract. Cantu argued that the mailbox rule should not apply because her offer was made in person and the superintendent was not authorized to accept by using mail. Is this a good argument?

Click here for the solution: Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year

Tinker Construction had a contract with Scroge to build a factory addition for Scroge by a particular date

Tinker Construction had a contract with Scroge to build a factory addition for Scroge by a particular date. The contract contained a penalty clause exacting daily penalties for late performance, and Tinker was working hard to complete the building on time. Because prompt completion of the addition was so important to Scroge, however, Scroge offered Tinker a bonus if it completed the factory addition on time. Scroge also learned that the supplier of parts for machinery that he had contracted for had called and said that it could not deliver the parts on Scroge’s schedule for the price it had agreed to. Because there was no other supplier, Scroge promised to pay the requested higher price. The factory addition was completed on time and the parts arrived on time. Scroge then refused to pay both the bonus to Tinker and the higher price for the parts. Were these promises enforceable?

Click here for the solution: Tinker Construction had a contract with Scroge to build a factory addition for Scroge by a particular date

Smith Construction Company was awarded a contract to construct an interchange at the junction of Interstate 5 and US Highway 27 at a total contract price of $8,000,000

Smith Construction Company was awarded a contract to construct an interchange at the junction of Interstate 5 and US Highway 27 at a total contract price of $8,000,000. The estimated total costs to complete the project were $6,000,000.

Instructions
(a) Make the entry to record construction costs of $3,600,000, on construction in process to date.
(b) Make the entry to record progress billings of $2,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-completion basis.

Click here for the solution: Smith Construction Company was awarded a contract to construct an interchange at the junction of Interstate 5 and US Highway 27 at a total contract price of $8,000,000

Green Co. has signed a long-contract to build a new sports arena

Green Co. has signed a long-contract to build a new sports arena. The total revenue related to the contract is $520 million. Estimated costs for the building the arena are $180 million in the first year and $130 million in both the second and third year. The costs cannot be reasonably estimated. How much revenue should Green Co. report in their first year under iGAAP.

Click here for the solution: Green Co. has signed a long-contract to build a new sports arena

(Present Value Analysis) James Hardy recently rejected a $20,000,000, five-year contract with the Vancouver Seals

PROBLEM 9-1. Present Value Analysis [LO 1, 5] James Hardy recently rejected a $20,000,000, five-year contract with the Vancouver Seals. The contract offer called for an immediate signing bonus of $5,000,000 and annual payments of $3,000,000. To sweeten the deal, the president of player personnel for the Seals has now offered a $22,000,000, five-year contract. This contract calls for annual increases and a balloon payment at the end of five years.

Year 1 $ 3,000,000
Year 2 3,100,000
Year 3 3,200,000
Year 4 3,300,000
Year 5 3,400,000
Year 5 balloon payment 6,000,000
Total $22,000,000

Required
Suppose you are Hardy’s agent and you wish to evaluate the two contracts using a required rate of return of 12 percent. In present value terms, how much better is the second contract?

Click here for the solution: (Present Value Analysis) James Hardy recently rejected a $20,000,000, five-year contract with the Vancouver Seals

ACC 421 Week 3 During 2007 Pierson Company started a construction job with a contract price of $1,500,000

ACC 421 Week Three (Week 3)

Exercise 18-4 (E18-4) (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction job with a contract price of $1,500,000. The job was completed in 2009. The following information is available.

2007 2008 2009
Costs incurred to date $400,000 $935,000 $1,070,000
Estimated costs to complete 600,000 165,000 –0–
Billings to date 300,000 900,000 1,500,000
Collections to date 270,000 810,000 1,425,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2008.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

Click here for the solution: (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction job with a contract price of $1,500,000

(Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract

ACC 421 Week 3

Exercise 18-5 (E18-5) (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth Botsford uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2007, follow.
Balance Sheet
Accounts receivable—construction contract billings $21,500
Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2007 $18,200

Instructions
(a) How much cash was collected in 2007 on this contract?
(b) What was the initial estimated total income before tax on this contract?

Click here for the solution: (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract