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Chapter 18: Q9CA_1 (page 1048)

WRITING (Long-Term Contract—Percentage-of-Completion) Widjaja Company is accounting for a long-term construction contract using the percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a profit to Widjaja Company.

Instructions

(a) What theoretical justification is there for Widjaja Company’s use of the percentage-of-completion method?

Short Answer

Expert verified

The business entity can use the percentage of completion method for recognizing revenue becausethe business entity is qualified for reporting revenue over a period of time.

Step by step solution

01

Definition of Long-Term Contract

A contract that does not end in one fiscal period or a contract that goes on for more than one year is known as a long-term contract.

02

Justification for the use ofthe percentage of completion method

The company is accounting for a long-term contract that will continue for four years, and also, the company qualifies for reporting revenue over time. Therefore, the company can use the percentage of completion method for recognizing revenue.

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Most popular questions from this chapter

Guillen, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process \)1,715,000, Accounts Receivable \(240,000, and Billings on Construction in Process \)1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2017, balance sheet.

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.

Instructions

(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.

(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.

(Determine Transaction Price) Bill Amends, owner of Real Estate Inc., buys and sells commercial properties. Recently, he sold land for \(3,000,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the \)3,000,000 sales price, Blackhawk Group agrees to pay Real Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is \(1,000,000 a year. Given the substantial increase in online sales that are occurring in the retail market, Bill had originally indicated that he would prefer a higher price for the land instead of the 1% royalty arrangement and suggested a price of \)3,250,000. However, Blackhawk would not agree to those terms.

Instructions

What is the transaction price for the land and related royalty payment that Real Estate Inc. should record?

Explain a principal-agent relationship and its significance to revenue recognition.
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