LIBERTY ACCT 301 CHAPTER 5 Summer B 2015

| June 4, 2016

Question
(ACCT 301 – Summer B 2015 3)

Assignment:

Chapter 5

1.

On July 1, 2013, Apache Company sold a parcel of undeveloped land to a construction company for $3,200,000. The book value of the land on Apache’s books was $1,280,000. Terms of the sale required a down payment of $320,000 and 9 annual payments of $320,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2014. Apache has no significant obligations to perform services after the sale.

How much gross profit will Apache recognize in both 2013 and 2014 assuming point of delivery profit recognition?

2.

Charter Corporation, which began business in 2013, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2013 and 2014:

2013

2014

Installment sales

$

500,000

$

490,000

Cost of installment sales

375,000

441,000

Cash collections on installment sales during:

2013

150,000

120,000

2014

150,000

Required:

1.

How much gross profit should Charter recognize in 2013 and 2014 from installment sales?

2.

What should be the balance in the deferred gross profit account at the end of 2013 and 2014?

3.

On July 1, 2013, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2014. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $120,000. The company uses the perpetual inventory system.

Required:

1.

Prepare the necessary journal entries for 2013 and 2014 using point of delivery revenue recognition. Ignore interest charges.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

2.

Prepare the necessary journal entries for 2013 and 2014, applying the installment sales method.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

3.

Prepare the necessary journal entries for 2013 and 2014, applying the cost recovery method.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

4.

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2013 and was completed in 2014. Data relating to the contract are summarized below:

2013

2014

Costs incurred during the year

$

300,000

$

1,575,000

Estimated costs to complete as of 12/31

1,200,000

0

Billings during the year

380,000

1,620,000

Cash collections during the year

250,000

1,750,000

Required:

1.

Compute the amount of gross profit or loss to be recognized in 2013 and 2014 using the percentage-of-completion method.

2.

Compute the amount of gross profit or loss to be recognized in 2013 and 2014 using the completed contract method.

3.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2013 using the percentage-of-completion method.

4.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2013 using the completed contract method.

5.

On June 15, 2013, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of 2015, just in time for the 2015 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

2013

2014

2015

Costs incurred during the year

$

40

$

80

$

50

Estimated costs to complete as of 12/31

120

60

Required:

1.

Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage-of-completion method.(Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

2.

How much revenue will Sanderson report in each of three years using the percentage-of-completion method?(Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

3.

Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method.(Enter your answers in millions.)

4.

Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate.(Enter your answers in millions.)

5.

Suppose the estimated costs to complete at the end of 2014 are $80 million instead of $60 million. Determine the amount of gross profit or loss to be recognized in 2014 using the percentage-of-completion method.(Enter your answer in millions. Do not round intermediate calculations.)

6.

Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2013 and 2014 is as follows:

2013

2014

Sales

$

260,000

$

360,000

Cost of sales

169,000

234,000

Customer collections on:

2013 sales

100,000

80,000

2014 sales

130,000

Required:

1.

Calculate the amount of gross profit that would be recognized each year from installment sales.

2.1

Prepare all necessary journal entries for the year 2013.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

2.2

Prepare all necessary journal entries for the year 2014.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

Assume that Ajax uses the cost recovery method to account for its installment sales.

3.1

Compute the following:

3.2

Prepare all necessary journal entries for the year 2013.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

3.3
Prepare all necessary journal entries for the year 2014.(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

7.

In 2013, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2015. Information related to the contract is as follows:

2013

2014

2015

Cost incurred during the year

$

2,739,000

$

3,735,000

$

2,008,600

Estimated costs to complete as of year-end

5,561,000

1,826,000

0

Billings during the year

2,300,000

4,174,000

3,526,000

Cash collections during the year

2,070,000

3,900,000

4,030,000

Westgate uses the percentage-of-completion method of accounting for long-term construction contracts.

Required:

1.

Calculate the amount of gross profit (loss) to be recognized in each of the three years.(Do not round intermediate calculations.)

2.1

In the journal below, complete the necessary journal entries for the year 2013 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field. Do not round intermediate calculations.)

2.2

In the journal below, complete the necessary journal entries for the year 2014 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field. Do not round intermediate calculations.)

2.3

In the journal below, complete the necessary journal entries for the year 2015 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field. Do not round intermediate calculations.)

3.

Complete the information required below to prepare a partial balance sheet for 2013 and 2014 showing any items related to the contract.(Do not round intermediate calculations.)

4.

Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information.(Do not round intermediate calculations.)

2013

2014

2015

Costs incurred during the year

$

2,430,000

$

3,815,000

$

3,230,000

Estimated costs to complete as of year-end

5,630,000

3,130,000

0

5.

Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information.(Do not round intermediate calculations.)

2013

2014

2015

Costs incurred during the year

$

2,430,000

$

3,815,000

$

3,945,000

Estimated costs to complete as of year-end

5,630,000

4,130,000

0

8.

In 2013, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2015. Information related to the contract is as follows:

2013

2014

2015

Cost incurred during the year

$

1,400,000

$

3,150,000

$

2,695,000

Estimated costs to complete as of year-end

5,600,000

2,450,000

0

Billings during the year

1,000,000

3,550,000

5,450,000

Cash collections during the year

900,000

2,600,000

6,600,000

Westgate uses the completed contract method of accounting for long-term construction contracts.

Required:

1.

Calculate the amount of gross profit (loss) to be recognized in each of the three years.

2.1

In the journal below, complete the necessary journal entries for the year 2013 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

2.2

In the journal below, complete the necessary journal entries for the year 2014 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

2.3

In the journal below, complete the necessary journal entries for the year 2015 (creditvarious accountsfor construction costs incurred).(If no entry is required for a particular transaction, select “No journal entry required” in the first account field.)

3.

Complete the information required below to prepare a partial balance sheet for 2013 and 2014 showing any items related to the contract.

4.

Calculate the amount of gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

2013

2014

2015

Costs incurred during the year

$

2,600,000

$

3,900,000

$

3,300,000

Estimated costs to complete as of year-end

5,800,000

3,300,000

0

5.

Calculate the amount of gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.

2013

2014

2015

Costs incurred during the year

$

2,600,000

$

3,900,000

$

4,200,000

Estimated costs to complete as of year-end

5,800,000

4,300,000

0

9.

Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry—Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts).

Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.

Balance Sheets
($ in millions, except per share data)

J&J

Pfizer

Assets:

Cash

$

5,377

$

1,520

Short-term investments

4,146

10,432

Accounts receivable (net)

6,574

8,775

Inventories

3,588

5,837

Other current assets

3,310

3,177

Current assets

22,995

29,741

Property, plant, and equipment (net)

9,846

18,287

Intangibles and other assets

15,422

68,747

Total assets

$

48,263

$

116,775

Liabilities and Shareholders’ Equity:

Accounts payable

$

4,966

$

2,601

Short-term notes

1,139

8,818

Other current liabilities

7,343

12,238

Current liabilities

13,448

23,657

Long-term debt

2,955

5,755

Other long-term liabilities

4,991

21,986

Total liabilities

21,394

51,398

Capital stock (par and additional paid-in capital)

3,120

67,050

Retained earnings

30,503

29,382

Accumulated other comprehensive income (loss)

(590

)

195

Less: treasury stock and other equity adjustments

(6,164

)

(31,250

)

Total shareholders’ equity

26,869

65,377

Total liabilities and shareholders’ equity

$

48,263

$

116,775

Income Statements

Net sales

$

41,862

$

45,188

Cost of goods sold

12,176

9,832

Gross profit

29,686

35,356

Operating expenses

19,763

28,486

Other (income) expense—net

(385

)

3,610

Income before taxes

10,308

3,260

Tax expense

3,111

1,621

Net income

$

7,197

$

1,639

*

Basic net income per share

$

2.42

$

0.22

*

This is before income from discontinued operations. There were no other separately reported items for either company.

Evaluate and compare the two companies by responding to the following questions.

Note:Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.

Required:

1.1

Compute the receivables turnover for both the companies.(Round your answers to 2 decimal places.)

1.2

Compute the average collection for both the companies.(Consider 365 days a year. Round your answers to the nearest whole days.)

1.3

Which of the two companies appears more efficient in collecting its accounts receivable?

1.4

Compute the inventory turnover for both the companies.(Round your answers to 2 decimal places.)

1.5

Compute the average days in inventory for both the companies.(Consider 365 days a year. Round your answers to the nearest whole number.)

1.6

Which of the two companies appears more efficient in managing its inventory?

2.1

Compute the rate of return on assets for both the companies.(Round your answers to 1 decimal place.)

2.2

Which of the two firms had greater earnings relative to resources available?

3.1

Compute the profit margin, asset turnover and return on assets.(Do not round intermediate calculations.The expected format for rounding is presented in each row of the table.)

3.2

Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?

4.1

Compute the rate of return on shareholders’ equity for both the companies.(Round your answers to 1 decimal place.)

4.2

From the perspective of a common shareholder, which of the two firms provided a greater rate of return?

5.

Compute the equity multiplier shareholders’ equity for both the companies.(Round your answers to 2 decimal places.)

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