Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 18: Q.18-10_2 (page 1045)

Question: P18-10 (LO5,6,7) (Long-Term Contract with Interim Loss) On March 1, 2017, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of \(8,400,000. The building was completed by October 31, 2019. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2017, 2018, and 2019 are given below.

2017

2018

2019

Contract cost incurred during the year

\)2,880,000

\(2,230,000

\)2,190,000

Estimated cost to complete the contract at 12/31

3,520,000

2,190,000

0

Billings to Fabrik during the year

3,200,000

3,500,000

1,700,000


Instructions

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, 2017, 2018, and 2019. (Ignore incomes taxes.)

Short Answer

Expert verified

Answer

The business entity will recognize$1,100,000 in gross profit in 2019.

Step by step solution

01

Definition of Contract Price

Contract price can be defined as the sum agreed upon a contract payable on completion or execution of the contract. In other words, it can be said as the consideration paid against the contract.

02

Gross profit under the complete contract method

Particular

Amount $

Contract price

$8,400,000

Less: Cost incurred

(7,300,000)

Gross profit

$1,100,000

No gross profit will be recognized for 2017 and 2018 because the contract gets completed in 2019.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

(Determine Transaction Price) Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2018. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2018. Under a new policy, if payment for 2019 season slips is made by December 31, 2018, a 5% discount is allowed. If payment for 2020 season slips is made by December 31, 2018, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).

On December 31, 2017, all 300 slips for the 2018 season were rented at full price. On December 31, 2018, 200 slips were reserved and paid for the 2019 boating season, and 60 slips were reserved and paid for the 2020 boating season.

Instructions

(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.

(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.

Instructions

(a) Prepare Zagat’s journal entry necessary on March 1, 2017.

(b) Prepare Zagat’s journal entry for the repurchase of the ingots on May 1, 2017.

What qualitative and quantitative disclosures are required related to revenue recognition?
See all solutions

Recommended explanations on Business Studies Textbooks

Business Case Studies

Read Explanation

Operational Management

Read Explanation

Managerial Economics

Read Explanation

Business Development

Read Explanation

Human Resources

Read Explanation

Financial Performance

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free