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Chapter 18: Q1FSAC_1 (page 1049)

Westinghouse Electric Corporation

The following note appears in the “Summary of Significant Accounting Policies” section of the Annual Report of Westinghouse Electric Corporation.

Note 1 (in part): Revenue Recognition. Sales are primarily recorded as products are shipped and services are rendered. The percentage of completion method of accounting is used for nuclear steam supply system orders with delivery schedules generally in excess of five years and for certain construction projects where this method of accounting is consistent with industry practice.

WFSI revenues are generally recognized on the accrual method. When accounts become delinquent for more than two payment periods, usually 60 days, income is recognized only as payments are received. Such delinquent accounts for which no payments are received in the current month, and other accounts on which income is not being recognized because the receipt of either principal or interest is questionable, are classified as nonearning receivables.

Instructions

(a) Identify the revenue recognition methods used by Westinghouse Electric as discussed in its note on significant accounting policies.

Short Answer

Expert verified

The company is using two methods for recognizing revenue:

  1. Complete contract Method.
  2. Percentage of Completion Method.

Step by step solution

01

Definition of Accounting Policies

The procedures adopted by the business entities to prepare the financial statement are known as accounting policies.

02

Revenue recognition method used

  1. Complete contract method: The business entity uses the complete contract method when the product and services are rendered.
  2. Percentage of completion method: The business entity uses the percentage of completion method for the nuclear steam supply system because the delivery of such service usually exceeds five years.

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Most popular questions from this chapter

Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of \(8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(a) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement.

(b) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of \)3,600.

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

Allee Corp evaluates a revenue arrangement to determine proper revenue recognition. The contract is for the construction of 10 speedboats for a contract price of \(400,000. The customer needs the boats in its showrooms by February 1, 2018, for the boat purchase season; the customer provides a bonus payment of \)21,000 if all ships are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week that the boats are delivered after the deadline until no compensation is paid if the ships are provided after February 15, 2018. Allee frequently includes such bonus terms in its contracts and thus has good historical data for estimating the probabilities of completion at different dates. It calculates an equal likelihood (25%) for each delivery outcome. What approach should Allee use to determine the transaction price for this contract? Explain.

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

(Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan’s projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex’s Reclaimers revenue arrangement with Dan’s Demolition.

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