AC501
Financial Accounting and Reporting
Kaplan University
Michael J. Baker
Exercise 7-5
(a)
Andre Agassi Construction Company
Completed-Contract Method
For Year Ended December 31, 2008
There is no computation necessary as there is no gross profit to be recognized under the completed-contract method prior to completion of the contract.
(b)
Andre Agassi Construction Company
Percentage-of-Completion Method
For Year Ended December 31, 2008
Total contract price $ 6,300,000
Total estimated cost 5,390,000
Gross profit $ 910,000
Percentage of completion ($ 1,185,800 / $ 5,390,000) 22%
Gross profit to be recognized ($ 910,000 X 22%) $ 200,200
Exercise 7-8
(a) Kenny Harrison Corporation
Installment-Sales Method
Computation of gross profit to be recognized on 2009 income statement:
2008 2009
Installment sales $ 480,000 $ 620,000
Gross profit as percentage of cost 25% 28%
Cash collections on 2008 sales $ 140,000 $ 240,000 Cash collection on 2009 sales $ 0 $ 180,000 Total cash collections $ 140,000 $ 420,000
X Gross profit percentage of sales 20% a 22% b
Gross profit to be recognized $ 28,000 $ 92,400
a Gross profit percentage of sales = Gross profit percentage of cost/(1 + gross percentage of cost) = .25/(1 + .25) = .25/1.25 = 20%
b Gross profit percentage of sales = Gross profit percentage of cost/(1 + gross percentage of cost) = .28/(1 + .28) = .28/1.28 = 22%
(b) Kenny Harrison Corporation
Cost-Recovery Method
Computation of gross profit to be recognized on 2009 income statement:
Year Cash Received Cost Recovered Cost Not Recovered Gross Profit Beg. Bal. - - $ 360,000 -
12/31/08 $ 140,000 $ 140,000 $ 220,000 $ 0 12/31/09 $ 240,000 $ 220,000 $ 0 $ 20,000
Exercise 8-9
(a)
Reba McIntyre, Inc. Entry for Estimated Bad Debts 4% of Gross Accounts Receivable
Gross accounts receivable $ 90,000
Percentage 4 % _________
4% of gross accounts receivable $ 3,600 Current allowance for doubtful accounts (1,750)
Required adjustment $ 1,850
Entry for estimated bad debts:
Dr. Cr.