Exercise 4-1

Requirement 1
2000 2001
Contract price $2,000,000 $2,000,000
Actual costs to date 300,000 1,875,000
Estimated costs to complete 1,200,000 -0-
Total estimated costs 1,500,000 1,875,000
Estimated gross profit $ 500,000 $ 125,000

Gross profit recognition:

2000: $ 300,000
= 20% x $500,000 = $100,000
$1,500,000

2001: $125,000 - $100,000 = $25,000

Requirement 2
2000 $ -0-
2001 $125,000

Requirement 3

Balance Sheet
At December 31, 2000
Current assets:
Accounts receivable $ 110,000
Construction in progress $400,000*
Less: Billings (360,000)
Costs and profit in excess of billings 40,000

* Costs ($300,000) + profits ($100,000)

Exercise 4-1 (concluded)

Requirement 4

Balance Sheet
At December 31, 2000
Current assets:
Accounts receivable $ 110,000

Current liabilities:
Billings ($360,000) in excess of costs ($300,000) $ 60,000
Exercise 4-4
Situation 1 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 1,500,000 3,600,000 4,500,000
Estimated costs to complete 3,000,000 900,000 -0-
Total estimated costs 4,500,000 4,500,000 4,500,000
Estimated gross profit (loss) $ 500,000 $ 500,000 $ 500,000

Gross profit (loss) recognized:

2000: $1,500,000
= 33.3333% x $500,000 = $166,667
$4,500,000

2001: $3,600,000
= 80.0% x $500,000 = $400,000 - 166,667 = $233,333
$4,500,000

2002: $500,000 - 400,000 = $100,000

Situation 1 - Completed Contract

Year Gross profit recognized

2000 -0-
2001 -0-
2002 $500,000
Total gross profit $500,000
Exercise 4-4 (continued)

Situation 2 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 1,500,000 2,400,000 4,800,000
Estimated costs to complete 3,000,000 2,400,000 -0-
Total estimated costs 4,500,000 4,800,000 4,800,000
Estimated gross profit (loss) $ 500,000 $ 200,000 $ 200,000

Gross profit (loss) recognized:

2000: $1,500,000
= 33.3333% x $500,000 = $166,667
$4,500,000

2001: $2,400,000
= 50.0% x $200,000 = $100,000 - 166,667 = $(66,667)
$4,800,000

2002: $200,000 - 100,000 = $100,000

Situation 2 - Completed Contract

Year Gross profit recognized

2000 -0-
2001 -0-
2002 $200,000
Total gross profit $200,000
Exercise 4-4 (continued)

Situation 3 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 1,500,000 3,600,000 5,200,000
Estimated costs to complete 3,000,000 1,500,000 -0-
Total estimated costs 4,500,000 5,100,000 5,200,000
Estimated gross profit (loss) $ 500,000 $ (100,000) $ (200,000)

Gross profit (loss) recognized:

2000: $1,500,000
= 33.3333% x $500,000 = $166,667
$4,500,000

2001: $(100,000) - 166,667 = $(266,667)

2002: $(200,000) - (100,000) = $(100,000)

Situation 3 - Completed Contract

Year Gross profit (loss) recognized

2000 -0-
2001 $(100,000)
2002 (100,000)
Total project loss $(200,000)
Exercise 4-4 (continued)

Situation 4 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 500,000 3,500,000 4,500,000
Estimated costs to complete 3,500,000 875,000 -0-
Total estimated costs 4,000,000 4,375,000 4,500,000
Estimated gross profit (loss) $1,000,000 $ 625,000 $ 500,000

Gross profit (loss) recognized:

2000: $ 500,000
= 12.5% x $1,000,000 = $125,000
$4,000,000

2001: $3,500,000
= 80.0% x $625,000 = $500,000 - 125,000 = $375,000
$4,375,000

2002: $500,000 - 500,000 = $ - 0 -

Situation 4 - Completed Contract

Year Gross profit recognized

2000 -0-
2001 -0-
2002 $500,000
Total gross profit $500,000
Exercise 4-4 (continued)

Situation 5 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 500,000 3,500,000 4,800,000
Estimated costs to complete 3,500,000 1,500,000 -0-
Total estimated costs 4,000,000 5,000,000 4,800,000
Estimated gross profit (loss) $1,000,000 $ -0- $ 200,000

Gross profit (loss) recognized:

2000: $ 500,000
= 12.5% x $1,000,000 = $125,000
$4,000,000

2001: $ 0 - 125,000 = $(125,000)

2002: $200,000 - 0 = $200,000

Situation 5 - Completed Contract

Year Gross profit recognized

2000 -0-
2001 -0-
2002 $200,000
Total gross profit $200,000
Exercise 4-4 (concluded)

Situation 6 - Percentage-of-Completion

2000 2001 2002

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 500,000 3,500,000 5,300,000
Estimated costs to complete 4,600,000 1,700,000 -0-
Total estimated costs 5,100,000 5,200,000 5,300,000
Estimated gross profit (loss) $ (100,000) $ (200,000) $ (300,000)

Gross profit (loss) recognized:

2000: $(100,000)

2001: $(200,000) - (100,000) = $(100,000)

2002: $(300,000) - (200,000) = $(100,000)

Situation 6 - Completed Contract

Year Gross profit (loss) recognized

2000 $(100,000)
2001 (100,000)
2002 (100,000)
Total project loss $(300,000)
Exercise 4-9
Requirement 1

July 1, 2000 To record installment sale

Installment receivables................................................... 300,000
Sales revenue.............................................................. 300,000

Cost of goods sold.......................................................... 120,000

Inventory..................................................................... 120,000

To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000

July 1, 2001 To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000
Exercise 4-9 (continued)

Requirement 2

July 1, 2000 To record installment sale

Installment receivables................................................... 300,000
Inventory..................................................................... 120,000
Deferred gross profit................................................... 180,000

To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000

To recognize gross profit from installment sale

Deferred gross profit....................................................... 45,000
Realized gross profit................................................... 45,000

July 1, 2001 To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000

To recognize gross profit from installment sale

Deferred gross profit....................................................... 45,000
Realized gross profit................................................... 45,000
Exercise 4-9 (concluded)

Requirement 3

July 1, 2000 To record installment sale

Installment receivables................................................... 300,000
Inventory..................................................................... 120,000
Deferred gross profit................................................... 180,000

To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000

July 1, 2001 To record cash collection from installment sale

Cash................................................................................ 75,000
Installment receivables............................................... 75,000

To recognize gross profit from installment sale

Deferred gross profit....................................................... 30,000
Realized gross profit................................................... 30,000

Problem 4-2
Requirement 1
2000 2001 2002
Contract price $10,000,000 $10,000,000 $10,000,000
Actual costs to date 2,400,000 6,000,000 8,200,000
Estimated costs to complete 5,600,000 2,000,000 -0-
Total estimated costs 8,000,000 8,000,000 8,200,000
Estimated gross profit (loss) $ 2,000,000 $ 2,000,000 $ 1,800,000

Gross profit (loss) recognition:

2000: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
Problem 4-2 (continued)

2001: $6,000,000
= 75.0% x $2,000,000 = $1,500,000 - 600,000 = $900,000
$8,000,000
2002: $1,800,000 - 1,500,000 = $300,000

Requirement 2

2000 2001 2002

Construction in progress 2,400,000 3,600,000 2,200,000
Various accounts 2,400,000 3,600,000 2,200,000
To record construction costs.

Accounts receivable 2,000,000 4,000,000 4,000,000

Billings on construction contract 2,000,000 4,000,000 4,000,000
To record progress billings.

Cash 1,800,000 3,600,000 4,600,000

Accounts receivable 1,800,000 3,600,000 4,600,000
To record cash collections.

Construction in progress (gross profit) 600,000 900,000 300,000

Cost of construction (cost incurred) 2,400,000 3,600,000 2,200,000
Revenue from long-term contracts (1) 3,000,000 4,500,000 2,500,000
To record gross profit.
Problem 4-2 (continued)

(1) Revenue recognized:

2000: 30% x $10,000,000 = $3,000,000
2001: 75% x $10,000,000 = $7,500,000
Less: Revenue recognized in 2000 (3,000,000)
Revenue recognized in 2001 $4,500,000
2002: 100% x $10,000,000 = $10,000,000
Less: Revenue recognized in 2000 & 2001 (7,500,000)
Revenue recognized in 2002 $2,500,000

Requirement 3

Balance Sheet 2000 2001

Current assets:
Accounts receivable $ 200,000 $600,000
Construction in progress $3,000,000 $7,500,000
Less: Billings (2,000,000) (6,000,000)
Costs and profit in excess
of billings 1,000,000 1,500,000

Requirement 4
2000 2001 1999
Costs incurred during the year $2,400,000 $3,800,000 $3,200,000
Estimated costs to complete
as of year-end 5,600,000 3,100,000 -

2000 2001 1999

Contract price $10,000,000 $10,000,000 $10,000,000
Actual costs to date 2,400,000 6,200,000 9,400,000
Estimated costs to complete 5,600,000 3,100,000 -0-
Total estimated costs 8,000,000 9,300,000 9,400,000
Estimated gross profit (loss) $ 2,000,000 $ 700,000 $ 600,000
Problem 4-2 (concluded)

Gross profit (loss) recognition:

2000: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000

2001: $6,200,000
= 66.6667% x $700,000 = $466,667 - 600,000 = $(133,333)
$9,300,000

2002: $600,000 - 466,667 = $133,333

Requirement 5
2000 2001 2002
Costs incurred during the year $2,400,000 $3,800,000 $3,900,000
Estimated costs to complete
as of year-end 5,600,000 4,100,000 -

2000 2001 2002

Contract price $10,000,000 $10,000,000 $10,000,000
Actual costs to date 2,400,000 6,200,000 10,100,000
Estimated costs to complete 5,600,000 4,100,000 -0-
Total estimated costs 8,000,000 10,300,000 10,100,000
Estimated gross profit (loss) $ 2,000,000 $ (300,000) $ (100,000)

Gross profit (loss) recognition:

2000: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000

2001: $(300,000) - 600,000 = $(900,000)

2002: $(100,000) - (300,000) = $200,000

Problem 4-8
1. Inventory turnover ratio
2. Average days in inventory
3. Receivables turnover ratio
4. Average collection period
5. Asset turnover ratio
6. Profit margin on sales
7. Return on assets
or:
8. Return on
shareholders’ equity
$6,300 ÷ [($800 + 600) ÷ 2] = 9.0
365 ÷ 9.0 = 40.56 days
$9,000 ÷ [($600 + 400) ÷ 2] = 18.0
365 ÷ 18.0 = 20.28 days
$9,000 ÷ [($4,000 + 3,600) ÷ 2] = 2.37
$300 ÷ $9,000 = 3.33%
$300 ÷ [($4,000 + 3,600) ÷ 2] = 7.89%
3.33% x 2.37 times = 7.89%
$300 ÷ [($1,500 + 1,350) ÷ 2] = 21.1%