chapter 5 - alternate solutions

7/23/2019 Chapter 5 - Alternate Solutions

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Chapter 5 Income Measurement and Profitability Analysis

EXERCISESRequirement 1

ear Income reco!ni"ed2013 $250,000 ($400,000 - 150,000)

2014 – 0 – 2015 – 0 – 2016 – 0 – 2017 – 0 –

Total $250,000Requirement #

ear Cash Collected Cost Reco$ery%&'(5)* +ross Profit%,#(5)*

2013 $100,000 $ 37,500 $ 62,5002014 75,000 28,125 46,8752015 75,000 28,125 46,8752016 75,000 28,125 46,8752017 75,000 28,125 46,875

Totals $400,000 $150,000 $250,000

Requirement &

ear Cash Collected Cost Reco$ery +ross Profit2013 $100,000 $100,000 - 0 -2014 75,000 50,000 $ 25,0002015 75,000 - 0 - 75,000

2016 75,000 - 0 - 75,0002017 75,000 - 0 - 75,000 Totals $400,000 $150,000 $250,000

© The McGraw-Hill Companies, Inc., 2013

Alternate Eercise an! "ro#lem $ol%tions &-1

E-ercise 5.1



Requirement 1

#/1& #/10

Contract price $2,600,000 $2,600,000Actual costs to ate 360,000 2,010,000!sti"ate costs to co"plete 1,560,000 - 0 -Total esti"ate costs 1,#20,000 2,010,000!sti"ate (actual) ross pro%it $ 680,000 $ 5#0,000

+ross profit reco!nition2013& $ 360,000

' 1875 * $680,000 ' 21#'35//$1,#20,000

2014& $5#0,000 - 127,500 ' 20,#35//

Requirement #2013 $ - 0 -2014 $5#0,000

Requirement &

4alance Sheet

At ecember &13 #/1&C%rrent assets'

Accounts recei+ale $ 110,000Costs an pro%it ($487,500) in e*cess o% illins ($430,000) 57,500

Costs ($360,000) . pro%it ($127,500)


&-2 Interme!iate Acco%ntin(, )*e

E-ercise 5.#



Exercise 5-2 (concluded)

Requirement 0

4alance SheetAt ecember &13 #/1&

C%rrent assets'Accounts recei+ale $ 110,000

C%rrent lia#ilities'/illins ($430,000) in e*cess o% costs ($360,000) $ 70,000

Requirement 1

#/1& #/10 #/15Contract price $12,000,000 $12,000,000 $12,000,000Actual costs to ate 3,000,000 7,000,000 12,800,000!sti"ate costs to co"plete 6,000,000 5,600,000 - 0 -Total esti"ate costs #,000,000 12,600,000 12,800,000!sti"ate ross pro%it (loss) $ 3,000,000 $ (600,000 ) $ (800,000 )

+ross profit %loss* reco!nition

2013& $3,000,000 ' 333333 * $3,000,000 ' 213///3///$#,000,000

2014& $(600,000) - 1,000,000 ' 2%13,//3///*

2015& $(800,000) - (600,000) ' 2%#//3///*



E-ercise 5.&



Exercise 5-3 (continued)

Requirement #

#/1& #/10

Construction in proress 3,000,000 4,000,000 arious accounts 3,000,000 4,000,000To recor! constr%ction costs.

Accounts recei+ale 3,800,000 3,500,000 /illins on construction contract 3,800,000 3,500,000To recor! pro(ress #illin(s.

Cas 3,250,000 3,600,000 Accounts recei+ale 3,250,000 3,600,000To recor! cash collections.

Construction in proress(ross pro%it) 1,000,000

Cost o% construction 3,000,000 e+enue %ro" lon-ter" contracts (333333 * $12,000,000) 4,000,000To recor! (ross pro+it.

Cost o% construction (2) 4,266,667 e+enue %ro" lon-ter" contracts (1) 2,666,667 Construction in proress (loss) 1,600,000To recor! epecte! loss.

(1) an (2)&ercent co"plete ' $7,000,000 $12,600,000 ' 5555 e+enue reconie to ate& 5555 * $12,000,000 ' $6,666,667

ess& e+enue reconie in 2013 (ao+e) (4,000,000) e+enue reconie in 2014 2,666,667 (1) lus& oss reconie in 2014 (ao+e) 1,600,000 Cost o% construction, 2014 $4,266,667 (2)


&- Interme!iate Acco%ntin(, )*e

Exercise 5-3 (concluded)

Requirement &

4alance Sheet #/1& #/10

C%rrent assets'Accounts recei+ale $550,000 $450,000Costs an pro%it ($4,000,000) in e*cess o% illins ($3,800,000) 200,000

C%rrent lia#ilities'/illins ($7,300,000) in e*cess

o% costs less loss ($6,400,000) $#00,000

Costs ($3,000,000) . pro%it ($1,000,000)

6o$ember 153 #/1& 7o record franchise a!reement and do8n paymentCas (50 * $25,000) 12,500

ote recei+ale 12,500nearne %rancise %ee re+enue 25,000

9ebruary 153 #/10 7o reco!ni"e franchise fee re$enuenearne %rancise %ee re+enue 25,000

9rancise %ee re+enue 25,000

Turno+er ratios %or :arret ; <ons =usic Co"pan> %or 2013&


Alternate Eercise an! "ro#lem $ol%tions &-&

E-ercise 5.0

E-ercise 5.5

Te co"pan> turns its in+entor> o+er 7 ti"es per >ear co"pare to te inustr>a+erae o% 6 ti"es per >ear Te asset turno+er ratio also is slitl> etter tan teinustr> a+erae (233 ti"es per >ear +ersus 2 ti"es) Tese ratios inicate tat :arret; <ons is ale to enerate "ore sales per ollar in+este in in+entor> an in total assetstan te inustr> a+eraes Te co"pan> also is ale to collect its recei+ales ?uic@er tan te inustr> a+erae (255 a>s co"pare to te inustr> a+erae o% 28 a>s)

Requirement 1

a( Profit mar!in on sales $360 $7,200 ' 5b( Return on assets $360 ($2,#00 . 2,700) 2B ' 1286

c( Return on shareholders: equity $360 ($1,700 . 1,550) 2B ' 222Requirement #

a( Profit mar!in on sales $360 $7,200 ' 5b( Asset turno$er $7200 ($2,#00 . 2,700) 2B ' 257c( Equity multiplier ($2,#00 . 2,700) 2B ($1,700 . 1,550) 2B ' 172d( Return on shareholders: equity $360 ($1,700 . 1,550) 2B ' 222

5 * 257 * 172 ' 221© The McGraw-Hill Companies, Inc., 2013


n+entor> turno+er ratio ' $6,000,000

$850,000 . 700,000B 2

' 774 ti"es

ecei+ales turno+er ratio ' $10,000,000

$800,000 . 600,000B 2

' 142# ti"es

A+erae collection perio ' 365

142#

' 255 a>s

Asset turno+er ratio ' $10,000,000

$4,4#0,000 . 4,100,000B 2

' 233 ti"es

E-ercise 5.,



Requirement &etaine earnins einnin o% perio $550,000A& et inco"e 360,000

#10,000ess& etaine earnins en o% perio 700,000Di+iens pai $210,000

Requirement 1

$30,000 . ($10,000 * 35) ' $33,500

Requirement #Te "ost li@el> a"ount is $30,000, ecause te proailit> o% e*ceein te

per%or"ance tresol is less tan 50

Requirement &:i+en tat te outco"e is inar> (=oan eiter Eill recei+e te onus or not), te"ost li@el> a"ount o%ten Eoul e pre%erre FoEe+er, ot a"ounts can e

Gusti%ie teoreticall> (Te proailit>-Eeite a"ount is an e*pecte +alue, antus o+er all suc contracts is te est esti"ate o% te a+erae a"ount tat Eill erecei+e)

Requirement 0:i+en tat aspects o% receipt o% te onus are e>on =oanHs control (ecause9iser is responsile %or i"ple"entation), =oan Eoul +ieE te onus as not

reasonal> assure Tere%ore, =oan Eoul reconie onl> $30,000 uponeli+er> o% te plan an Eait until receipt o% te onus is reasonal> assure(li@el> Eaitin until cost sa+in reaces te pre-speci%ie taret) e%orereconiin te onus


Alternate Eercise an! "ro#lem $ol%tions &-)

E-ercise 5.'

PR;4<EMSRequirement 1

Total pro%it ' $800,000 - 400,000 ' $400,000

nstall"ent sales "eto& :ross pro%it ' $400,000 $800,000 ' 50

1/=&1=1& 1/=&1=10 1/=&1=15 1/=&1=1,

Cas collections $200,000 $200,000 $200,000 $200,000

a( Point of deli$ery method $400,000 - 0 - - 0 - - 0 -

b( Installment sales method (50 * cas collecte) $100,000 $100,000 $100,000 $100,000

c( Cost reco$ery method - 0 - - 0 - $200,000 $200,000



Problem 5.1

Problem 5-1 (continued)

Requirement #

Point of eli$ery

InstallmentSales Cost Reco$ery

nstall"ent recei+ale 800,000 <ales re+enue 800,000Cost o% oos sol 400,000 n+entor> 400,000To recor! sale on 10*31*13.

nstall"ent recei+ale 800,000 800,000 n+entor> 400,000 400,000 De%erre ross pro%it

To recor! sale on 10*31*1.

400,000 400,000

Cas 200,000 200,000 200,000 nstall"ent recei+ale 200,000 200,000 200,000 Entr/ ma!e each ct. 31.

De%erre ross pro%it 100,000 ealie ross pro%itTo recor! (ross pro+it. Entr/ ma!e each ct. 31.

100,000

De%erre ross pro%it 200,000 ealie ross pro%itTo recor! (ross pro+it. Entr/ ma!e 10*31*1& 10*31*1.

200,000


Alternate Eercise an! "ro#lem $ol%tions &-



Problem 5-1 (concluded)

Requirement &

Point of eli$ery

InstallmentSales

CostReco$ery

ecember &13 #/1& Assetsnstall"ent recei+alesess& De%erre ross pro%itnstall"ent recei+ales, net

600,000 600,000(300,000)300,000

600,000(400,000)200,000

ecember &13 #/10

Assetsnstall"ent recei+aleess& De%erre ross pro%itnstall"ent recei+ales, net

400,000 400,000(200,000)200,000

400,000(400,000)

- 0 -

Requirement 1

#/1& #/10 #/15Contract price $15,000,000 $15,000,000 $15,000,000Actual costs to ate 4,000,000 8,800,000 13,000,000!sti"ate costs to co"plete 8,000,000 4,000,000 - 0 -Total esti"ate costs 12,000,000 12,800,000 13,000,000!sti"ate ross pro%it (loss) $ 3,000,000 $ 2,200,000 $ 2,000,000

+ross profit %loss* reco!nition

2013& $4,000,000 ' 3333 * $3,000,000 ' 213///3///

$12,000,000

2014& $8,800,000 ' 6875 * $2,200,000 ' $1,512,500 - 1,000,000 ' 251#35//

$12,800,000

2015& $2,000,000 - 1,512,500 ' 20>'35//

Requirement #



Problem 5.#



#/1& #/10 #/15

Construction in proress 4,000,000 4,800,000 4,200,000 arious accounts 4,000,000 4,800,000 4,200,000To recor! constr%ction costs.

Accounts recei+ale 3,500,000 5,000,000 6,500,000 /illins on construction contract 3,500,000 5,000,000 6,500,000To recor! pro(ress #illin(s.

Cas 2,800,000 5,600,000 6,600,000 Accounts recei+ale 2,800,000 5,600,000 6,600,000To recor! cash collections.

Construction in proress %!ross profit* 1,000,000 512,500 487,500Cost o% construction %cost incurred* 4,000,000 4,800,000 4,200,000 e+enue %ro" lon-ter" contracts (1) 5,000,000 5,312,500 4,687,500To recor! (ross pro+it.



Problem 5-2 (continued)

(1) e+enue reconie&2013& 3333 * $15,000,000 ' $5,000,000

2014& 6875 * $15,000,000 ' $10,312,500 ess& e+enue reconie in 2013 (5,000,000)

e+enue reconie in 2014 $5,312,5002015& 100 * $15,000,000 ' $15,000,000

ess& e+enue reconie in 2013 ; 2014 (10,312,500)e+enue reconie in 2015 $4,687,500

Requirement &

/alance <eet #/1& #/10

C%rrent assets'Accounts recei+ale $ 700,000 $100,000Construction in proress $5,000,000 $10,312,500

ess& /illins (3,500,000 ) (8,500,000)Costs an pro%it in e*cess

o% illins 1,500,000 1,812,500

Requirement 0

#/1& #/10 #/15Costs incurre urin te >ear $4,000,000 $4,200,000 $7,200,000!sti"ate costs to co"plete

as o% >ear-en 8,000,000 7,100,000 -

#/1& #/10 #/15Contract price $15,000,000 $15,000,000 $15,000,000Actual costs to ate 4,000,000 8,200,000 15,400,000!sti"ate costs to co"plete 8,000,000 7,100,000 - 0 -Total esti"ate costs 12,000,000 15,300,000 15,400,000

!sti"ate ross pro%it (loss) $ 3,000,000 $ (300,000) $ (400,000)

+ross profit %loss* reco!nition2013& $4,000,000

' 3333 * $3,000,000 ' 213///3///$12,000,000

2014& 100 * $(300,000) ' $(300,000) - 1,000,000 ' 2%13&//3///*

2015& $(400,000) – (300,000) ' 2%1//3///*

Requirement 1

a Te >" "e"ersip is one istinct per%or"ance oliation <ince teiscount +oucer pro+ies a "aterial rit to te custo"er tat te custo"erEoul not recei+e oterEise (a 35 percent iscount rater tan a 15 percentiscount), Eit its oEn pattern o% eli+er> an istinct %unction, te iscount+oucer also is a istinct per%or"ance oliation

To allocate te contract price to te per%or"ance oliation, Ee soul %irstconsier tat oa course to all

custo"ers as part o% a seasonal pro"otion <o, a 35 percent iscount pro+ies acusto"er Eit an incre"ental +alue o% 20 percent (35-15) Tus, teesti"ate stanalone sellin price o% te course +oucer pro+ie > <I is $20($400 initial price o% te course J 20 incre"ental iscount J 25 li@elioo o%e*ercisin te option) <ince te stanalone sellin price o% te annua"e"ersip %ee is $500, oa course

c <ince te iscount +oucer o% te >oa course Eoul e a istinct per%or"anceoliation, oa coupon 1#23



Problem 5.&

Requirement #

a Te option to pa> $12 %or aitional +isits oes not constitute a "aterial rit, ecause it is in te rane ($10-$14) o% nor"al %ees pai > non-"e"ersTere%ore, it is not a istinct per%or"ance oliation in te contract

<ince te option to +isit on aitional a>s is not a istinct per%or"anceoliation, o% te contract price to it Tere%ore teentire $400 pa>"ent is allocate to te 40 +isits associate Eit te coupon

oo@

c Cas $400

nearne re+enue, coupon oo@ $400

iels appro*i"atel> 30 +isits an te ser+ices are si"ultaneousl>recei+e an consu"e > te u>er Alternati+el>, ear %olloEin sale o% a coupon oo@ accorin to te passae o% ti"eas an appro*i"ation o% consu"ptions o% +isits

chapter 5 - alternate solutions

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