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American Company Inc

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.

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