1. American Company Inc. is a company with three divisions namely American Construction, American Publishing and American Securities Divisions. Below is information about each division as of October 31, 2013 when the accounting year ended.
American Construction Division
This division has $30,000,000 construction project which was granted in May 2013. The company began construction of the project on July 1, 2013. Estimated costs of completion at the contract date were $25,000,000 over a 2-year time period from contract date. As of fiscal year end, construction costs of $7,200,000had been incurred and progress billings of $9,500,000 had been made. On October 31, 2013, the construction costs to complete the project were estimated to be $16,800,000 because of an expected decline in raw materials costs. The division utilizes percentage-of-completion method to recognize revenue.
American Publishing Division
This division sells large volumes of novels to book distributors who will then sell to bookstores.
The distributors are allowed to return up to 30% of sales but over the past several years, the average is 20% return. In 2013, the division has sold books worth $7,000,000 to distributors. On October 31, 2013, $1,500,000 worth of books can still be returned while the remaining $5,500,000 had actual return rate of 21%. The division recognizes revenue when sales occur but take into consideration right of return.
American Securities Division
This division serves as an agent for home and business security systems. Customers are billed
directly for the systems plus actual shipping costs. The company received orders for $6,000,000 of
goods during the fiscal year 2013. $5,200,000 of goods were billed and shipped and payments of
$600,000 were received. Actual shipping costs of $100,000 were also billed. The division pays
commissions of 10% on product price to manufacturing agents after goods are shipped to
customers. The division uses revenue recognition at point of sale.
For each division, calculate the revenue to be recognized for fiscal year ended October 31, 2013.
2. Chase Construction Company (CCC) entered into a contract to build a parking complex. The project will commence on January 1, 2014. The complex will cost approximately $600,000 and will take 3 years to complete construction. CCC will bill its client $900,000 for the construction.
The following information contain data for the construction
Description 2014 2015 2016
Costs to date $270,000 $450,000 $610,000
Estimated costs to complete 330,000 150,000 0
Progress billings to date 270,000 550,000 900,000
Cash collected to date 240,000 500,000 900,000
a. Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year (2014, 2015, and 2016) of the construction.
b. Prepare all necessary journal entries for each year of the construction.
3. Schneider Company uses installment sales method. Below is a summary of its sales, cost of goods sold, and gross profit for three years.
Description 2013 2014 2015
Installment sales $250,000 $260,000 $280,000
Cost of goods sold 155,000 163,800 182,000
Gross profit 95,000 96,200 98,000
Schneider Company’s collections from customers are duplicated below:
Description 2013 2014 2015
2013 installment sales $75,000 $100,000 $50,000
2014 installment sales 100,000 120,000
2014 installment sales 100,000
Assume Schneider uses installment sales method of accounting
a. Compute the gross profit for 2013, 2014, and 2015.
b. Prepare journal entries for 2015.