Chapter 5 Solutions

Chapter 05 - Income Measurement and Profitability Analysis
Chapter 5
Income Measurement and Profitability
Analysis
Exercise 5-5
Requirement 1
July 1, 2011
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, 2012
Cash ................................................................................ 75,000
75,000
Requirement 2
July 1, 2011
Inventory.....................................................................
120,000
Deferred gross profit ..................................................
180,000
Cash ................................................................................ 75,000
75,000
To recognize gross profit from installment sale
Deferred gross profit ...................................................... 45,000
5-1
Realized gross profit...................................................
45,000
July 1, 2012
Cash ................................................................................ 75,000
75,000
45,000
Requirement 3
July 1, 2011
Inventory.....................................................................
120,000
Deferred gross profit ..................................................
180,000
Cash ................................................................................ 75,000
75,000
July 1, 2012
Cash ................................................................................ 75,000
75,000
30,000
5-2
Exercise 5-9
Requirement 1
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Gross profit (estimated in 2011)
2011
$2,000,000
300,000
1,200,000
1,500,000
$ 500,000
2012
$2,000,000
1,875,000
-01,875,000
$ 125,000
Gross profit recognition:

2011: $ 300,000
= 20% x $500,000 = $100,000
$1,500,000
2012:
$125,000 $100,000 = $25,000
Requirement 2
2011
2012
$ -0$125,000
Requirement 3
Balance Sheet
At December 31, 2011
Current assets:
Accounts receivable
Costs and profit ($400,000*) in excess
of billings ($380,000)
* Costs ($300,000) + profit ($100,000)
5-3
$ 130,000
20,000
Requirement 4
Balance Sheet
At December 31, 2011
Current assets:
Accounts receivable
$ 130,000
Current liabilities:
Billings ($380,000) in excess of costs ($300,000)
$ 80,000
Exercise 5-11
Requirement 1
Contract price
Estimated gross profit (loss)
(actual in 2013)
2011
$8,000,000
2,000,000
4,000,000
6,000,000
2012
$8,000,000
4,500,000
3,600,000
8,100,000
2013
$8,000,000
8,300,000
-08,300,000
$2,000,000
$ (100,000)
$ (300,000)
Gross profit (loss) recognition:

2011: $2,000,000
= 33.3333% x $2,000,000 = $666,667
$6,000,000
2012: $(100,000) 666,667 = $(766,667)
2013: $(300,000) (100,000) = $(200,000)
5-4
Requirement 2
Construction in progress
Various accounts
To record construction costs.
2011
2012
2,000,000
2,500,000
2,000,000
2,500,000
Accounts receivable
Billings on construction contract
To record progress billings.
2,500,000
2,750,000
2,500,000
2,750,000
Cash
Accounts receivable
To record cash collections.
2,250,000
2,475,000
2,250,000
2,475,000
(gross profit)
Cost of construction
Revenue from long-term contracts
666,667
2,000,000
(33.3333% x $8,000,000)
2,666,667
To record gross profit.

Cost of construction (2)
Revenue from long-term contracts
Construction in progress (loss)
To record expected loss.
(1)
2,544,000
1,777,333
766,667
(1) and (2):

Percent complete = $4,500,000 $8,100,000 = 55.55%
Revenue recognized to date:
55.55% x $8,000,000 =
$4,444,000
Less: Revenue recognized in 2011 (above)
(2,666,667)
Revenue recognized in 2012
1,777,333 (1)
Plus: Loss recognized in 2012 (above)
766,667
Cost of construction, 2012
$2,544,000 (2)
5-5
Requirement 3
Balance Sheet
2011
Current assets:
Accounts receivable
Costs and profit ($2,666,667*) in
excess of billings ($2,500,000)
2012
$250,000 $525,000
166,667
Billings ($5,250,000) in excess
of costs less loss ($4,400,000**)
$850,000
* Costs ($2,000,000) + profit ($666,667)

** Costs ($2,000,000 + $2,500,000) loss ($100,000 = $766,667 $666,667)
Exercise 5-12
Requirement 1
Year
2011
2012
2013
Total project loss
Gross profit (loss) recognized

-0$(100,000)
(200,000)
$(300,000)
Requirement 2
Various accounts
2011
2012
2,000,000
2,500,000
2,000,000
2,500,000
Accounts receivable
Billings on construction contract
2,500,000
2,750,000
2,500,000
2,750,000
Cash
Accounts receivable
2,250,000
2,475,000
2,250,000
2,475,000
5-6
Loss on long-term contract

To record an expected loss.
100,000
100,000
Exercise 5-12 (concluded)

Requirement 3
Balance Sheet
Current assets:
Accounts receivable
2011
$250,000
2012
$525,000
Billings ($2,500,000) in excess of costs
($2,000,000)
$500,000
Billings ($5,250,000) in excess of costs less

loss ($4,400,000*)
$850,000
* Costs ($2,000,000 + $2,500,000) loss ($100,000)
Exercise 5-14
Requirement 1
Construction in progress = Costs incurred + Profit recognized
$100,000
$20,000
Actual costs incurred in 2011 = $80,000

Requirement 2
Billings = Cash collections + Accounts Receivable
$94,000 =
$30,000
Cash collections in 2011 = $64,000
5-7
Requirement 3
Let A = Actual cost incurred + Estimated cost to complete
Actual cost incurred
x (Contract price A) = Profit recognized
A
$80,000
($1,600,000 A) = $20,000
A
$128,000,000,000 80,000A = $20,000A
$100,000A = $128,000,000,000
A = $1,280,000
Estimated cost to complete = $1,280,000 80,000 = $1,200,000
Requirement 4
$80,000
= 6.25%
$1,280,000
Exercise 5-15
Requirement 1
Revenue should be recognized as follows:
Software
date of shipment, July 1, 2011
Technical support evenly over the 12 months of the agreement
Upgrade
date of shipment, January 1, 2012
The amounts are determined by an allocation of total contract price in
proportion to the individual fair values of the components if sold separately:
Software
Technical support
Upgrade
Total
$210,000 $270,000 x $243,000 = $189,000

$30,000 $270,000 x $243,000 = 27,000
$30,000 $270,000 x $243,000
= 27,000
$243,000
5-8
Requirement 2
July 1, 2011
To record sale of software
Cash ................................................................................ 243,000

Revenue ......................................................................
189,000
Unearned revenue ($27,000 + 27,000) ...........................
54,000
Exercise 5-16
Requirement 1
Conveyer
Labeler
Filler
Capper
total
($20,000 $50,000) x $45,000 = $18,000

($10,000 $50,000) x $45,000 = 9,000
($15,000 $50,000) x $45,000 = 13,500
($5,000 $50,000) x $45,000 = 4,500
$45,000
Requirement 2
All $45,000 of revenue is delayed until installation of the conveyer,

because the usefulness of the other elements of the multi-part arrangement
is contingent on its delivery.
Exercise 5-17
Requirement 1
Conveyer
Labeler
Filler
Capper
total
($20,000 $50,000) x $45,000 = $18,000

($10,000 $50,000) x $45,000 = 9,000
($15,000 $50,000) x $45,000 = 13,500
($5,000 $50,000) x $45,000 = 4,500
$45,000
5-9
Requirement 2
Under IFRS, it is likely that Richardson would recognize revenue the same
as in Requirement 1, because (a) revenue for each part can be estimated
reliably and (b) the receipt of economic benefits is probable.
Problem 5-5
Requirement 1
Contract price
(actual in 2013)
2011
$10,000,000
2,400,000
5,600,000
8,000,000
2012
$10,000,000
6,000,000
2,000,000
8,000,000
2013
$10,000,000
8,200,000
-08,200,000
$ 2,000,000
$ 2,000,000
$ 1,800,000

2011: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2012: $6,000,000
= 75.0% x $2,000,000 = $1,500,000 600,000 = $900,000
$8,000,000
2013: $1,800,000 1,500,000 = $300,000
Requirement 2
2011
2012
2013
Various accounts
2,400,000
3,600,000
2,200,000
2,400,000
3,600,000
2,200,000
Accounts receivable
2,000,000
5-10
4,000,000
4,000,000
Billings on construction
contract
Cash
Accounts receivable
(gross profit)
(cost incurred)
Revenue from long-term
contracts (1)
2,000,000
4,000,000
4,000,000
1,800,000
3,600,000
4,600,000
1,800,000
3,600,000
4,600,000
600,000
900,000
300,000
2,400,000
3,600,000
2,200,000
3,000,000
(1) Revenue recognized:

2011: 30% x $10,000,000 =
2012: 75% x $10,000,000 =
Less: Revenue recognized in 2011
2013: 100% x $10,000,000 =
Less: Revenue recognized in 2011 & 2012
4,500,000
2,500,000
$3,000,000
$7,500,000
(3,000,000)
$4,500,000
$10,000,000
(7,500,000)
$2,500,000
Requirement 3
Balance Sheet
2011
Current assets:
Accounts receivable
$ 200,000
Construction in progress $3,000,000
Less: Billings
(2,000,000)
Costs and profit in excess
of billings
1,000,000
5-11
2012
$600,000
$7,500,000
(6,000,000)
1,500,000
Requirement 4
Costs incurred during the year
as of year-end
Contract price
Estimated gross profit
(actual in 2013)
2011
$2,400,000
2012
$3,800,000
2013
$3,200,000
5,600,000
3,100,000
2011
$10,000,000
2,400,000
5,600,000
8,000,000
2012
$10,000,000
6,200,000
3,100,000
9,300,000
2013
$10,000,000
9,400,000
-09,400,000
$ 2,000,000
$ 700,000
$ 600,000

2011: $2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2012: $6,200,000
= 66.6667% x $700,000 = $466,667 600,000 = $(133,333)
$9,300,000
2013:
$600,000 466,667 = $133,333
Requirement 5
as of year-end
Contract price
2011
$2,400,000
2012
$3,800,000
5,600,000
4,100,000
2011
$10,000,000
2,400,000
5,600,000
8,000,000
2012
$10,000,000
6,200,000
4,100,000
10,300,000
5-12
2013
$3,900,000
2013
$10,000,000
10,100,000
-010,100,000

(actual in 2013)
$ 2,000,000
$ (300,000)
$ (100,000)

2011:
$2,400,000
= 30.0% x $2,000,000 = $600,000
$8,000,000
2012:
$(300,000) 600,000 = $(900,000)
2013:
$(100,000) (300,000) = $200,000
Problem 5-7
Requirement 1
Year
2011
2012
2013
Total gross profit
Gross profit recognized

-0-0$1,800,000
$1,800,000
5-13
Requirement 2
Various accounts
2011
2012
2013
2,400,000
3,600,000
2,200,000
2,400,000
3,600,000
2,200,000
Accounts receivable
Billings on construction
contract
2,000,000
4,000,000
4,000,000
2,000,000
4,000,000
4,000,000
Cash
Accounts receivable
1,800,000
3,600,000
4,600,000
1,800,000
3,600,000
4,600,000
(gross profit)
(costs incurred)
Revenue from long-term
contracts (contract price)
1,800,000
2,400,000
2,400,000
5-14
3,600,000
3,600,000
2,200,000
4,000,000
Problem 5-7 (concluded)

Requirement 3
Balance Sheet
Current assets:
Accounts receivable
Less: Billings
Costs in excess of billings
2011
2012
$ 200,000
$ 600,000
$2,400,000
(2,000,000)
$6,000,000
(6,000,000)
400,000
-0-
Requirement 4
as of year-end
2011
$2,400,000
2012
$3,800,000
5,600,000
3,100,000
Year
2011
2012
2013
Total gross profit
2013
$3,200,000
-
Gross profit recognized

-0-0$600,000
$600,000
Requirement 5
as of year-end
2011
$2,400,000
2012
$3,800,000
5,600,000
4,100,000
Year
2011
2012
2013
Total project loss
2013
$3,900,000
-
Gross profit (loss) recognized

-0$(300,000)
200,000
$(100,000)
5-15
CPA Exam Questions

1. b. The earnings process is completed upon delivery of the product. Therefore,
in 2011, revenue for 50,000 gallons at $3 each is recognized. The payment
terms do not affect revenue recognition.
2. d. The deferred gross profit in the balance sheet at December 31, 2012 should
be the balances in the accounts receivable accounts for 2011 and 2012
multiplied times the appropriate gross profit percentage:
Accounts Receivable
Total Sales
Less: Collections
Less: Write Offs
Accounts Receivable Balance
x Gross Profit Rate
Deferred Gross Profit
12/31/2012
2011
2012
600,000 900,000
(300,000) (300,000)
(200,000) (50,000)
100,000
550,000
x 30%
x 40%
30,000
220,000
The Combined Deferred Gross Profit in the Balance Sheet is $250,000

($220,000 + $30,000).
3. a.
Year of sale
2011
2012
a. Gross profit realized
$240,000 $200,000
b. Percentage
30%
40%
c. Collections on sales (a/b) $800,000 $500,000
Total sales
1,000,000 2,000,000
Balance uncollected
$200,000 $1,500,000
The total uncollected balance is $1,700,000 ($200,000 + $1,500,000).
4. d. Construction-in-progress represents the costs incurred plus the cumulative
pro-rata share of gross profit under the percentage-of-completion method of
accounting. Construction-in-progress does not include the cumulative
effect of gross profit recognition under the completed contract method.
5-16
5. c.
2011 actual costs
$20,000
Total estimated costs 60,000
Ratio
= 1/3
Contract Price
x 100,000
Revenue
33,333
2011 actual costs
-20,000
Gross profit
$13,333
6. d. Since the total cost of the contract, $3,100,000 ($930,000 + $2,170,000) is
projected to exceed the contract price of $3,000,000, the excess cost of
$100,000 must be recognized as a loss in 2011.
CMA Exam Questions

1. c. Revenue is recognized when (1) realized or realizable and (2) earned. On May
28, $500,000 of the sales price was realized while the remaining $500,000 was
realizable in the form of a receivable. The revenue was earned on May 28
since the title of the goods passed to the purchaser. The cost-recovery method
is not used because the receivable was not deemed uncollectible until June 10.
2. d. Based on the revenue recognition principle, revenue is normally recorded at the
time of the sale or, occasionally, at the time cash is collected. However,
sometimes neither the sales basis nor the cash basis is appropriate, such as
when a construction contract extends over several accounting periods. As a
result, contractors ordinarily recognize revenue using the percentage-ofcompletion method so that some revenue is recognized each year over the life
of the contract. Hence, this method is an exception to the general principle of
revenue recognition, primarily because it better matches revenues and
expenses.
3. b. Given that one-third of all costs have already been incurred ($6,000,000), the
company should recognize revenue equal to one-third of the contract price, or
$8,000,000. Revenues of $8,000,000 minus costs of $6,000,000 equals a gross
profit of $2,000,000.
5-17

Chapter 5 Solutions

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Chapter 5 Solutions

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Chapter 05 - Income Measurement and Profitability Analysis

Income Measurement and Profitability

Chapter 05 - Income Measurement and Profitability Analysis

Realized gross profit...................................................

Chapter 05 - Income Measurement and Profitability Analysis

Gross profit recognition:

$125,000 $100,000 = $25,000

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

Chapter 05 - Income Measurement and Profitability Analysis

Gross profit (loss) recognition:

Chapter 05 - Income Measurement and Profitability Analysis

To record gross profit.

(1) and (2):

Chapter 05 - Income Measurement and Profitability Analysis

* Costs ($2,000,000) + profit ($666,667)

Gross profit (loss) recognized

Chapter 05 - Income Measurement and Profitability Analysis

Loss on long-term contract

Exercise 5-12 (concluded)

Billings ($5,250,000) in excess of costs less

* Costs ($2,000,000 + $2,500,000) loss ($100,000)

Actual costs incurred in 2011 = $80,000

Cash collections in 2011 = $64,000

Chapter 05 - Income Measurement and Profitability Analysis

$210,000 $270,000 x $243,000 = $189,000

Chapter 05 - Income Measurement and Profitability Analysis

To record sale of software

Cash ................................................................................ 243,000

($20,000 $50,000) x $45,000 = $18,000

All $45,000 of revenue is delayed until installation of the conveyer,

($20,000 $50,000) x $45,000 = $18,000

Chapter 05 - Income Measurement and Profitability Analysis

Gross profit (loss) recognition:

Chapter 05 - Income Measurement and Profitability Analysis

(1) Revenue recognized:

Chapter 05 - Income Measurement and Profitability Analysis

Gross profit (loss) recognition:

$600,000 466,667 = $133,333

Chapter 05 - Income Measurement and Profitability Analysis

Estimated gross profit (loss)

Gross profit (loss) recognition:

$(300,000) 600,000 = $(900,000)

$(100,000) (300,000) = $200,000

Gross profit recognized

Chapter 05 - Income Measurement and Profitability Analysis

Chapter 05 - Income Measurement and Profitability Analysis

Problem 5-7 (concluded)

Gross profit recognized

Gross profit (loss) recognized

Chapter 05 - Income Measurement and Profitability Analysis

CPA Exam Questions

The Combined Deferred Gross Profit in the Balance Sheet is $250,000

Chapter 05 - Income Measurement and Profitability Analysis

CMA Exam Questions

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