Fundamental Accounting Principles

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Problem # 3:

The Bryan Construction Company received a contract to build a new dormitory complex. The selling price of $30,000,000 will be paid when the complex is completed. The costs to construct the complex are as follows:
Year Cost
19X9 $4,000,000
20X0 9,000,000
20X1 8,000,000
$21,000,000

a. Assuming the contract is with a large state-supported school which is very strong financially, how much revenue should The Bryan Construction Company recognize in 19X9?

b. Assume, instead, that the contract is with a school whose financial status is uncertain, and hence the probability of collection is uncertain, how much revenue should Bryan recognize in 19X9?

Answer:

A) An option is to use the percentage of completion method. With this method, revenues and expenses associated with a long term contract are spread over the life of the contract, based on a measure of the effort completed in each period. The approach reduces the erratic reporting of revenues and earnings and provides useful economic information to users on a more timely basis.

Revenue for the period = costs incurred during the period / total estimated costs for the project X (estimated revenue)

=4,000,000/21,000,000 X 30,000,000
=5,700,000 (rounded #)

B) Given the background of this school, there is indeed reason to believe that full payment will not be received. Given this fact, it would be more appropriate to be conservative and only expect partial payment. To be conservative, they should only recognize 50% of the 4,000,000 in 19X9.

Problem # 4:

The Denton Company had the following balances at January 1, 20X0:
Accounts Receivable $250,000 Debit
Allowance for Uncollectible Accounts 16,000 Credit

The following activity occurred during 20X0:
1. Cash sales were $800,000
2. In addition, cash sales were made to special customers who were
given a 4% trade discount. The normal selling price (before the
discount) was $200,000.
3. Credit sales were $2,800,000
4. Collections on credit sales: cash collections were $2,608,000;
however, credit customers also took advantage of $42,000 worth of
cash discounts offered.
5. Sales returns and allowances on credit sales were $26,000. A full
credit was given by The Denton Company.
6. Write-offs of bad debts were $17,100.
7. Bad debt recoveries were $300.
8. The December 31, 20X0 estimation of bad debts is 7% of the ending
accounts receivable balance.

a. Prepare the appropriate journal entry for The Denton Company for each of the transactions noted above.

Answer:
a. 1. DR: Cash 800,000
CR: Revenues 800,000

2. DR: Cash 192,000
CR: Revenues 192,000

3. DR: Accounts Receivable 2,800,000
CR: Revenues 2,800,000

4. DR: Cash 2,608,000
CR: Accounts Receivable 2,566,000
CR: Cash discounts 42,000

5. DR: Revenues 26,000
CR: Cash 26,000
DR: Merchandise inventory 26,000
CR: Cost of goods sold 26,000

6. DR: Bed debt expense 17,100
CR: Allowance for doubtful accounts 17,100

7. DR: Cash 300
CR: Bad debt expense 300

8. A/R Balance (note: we are assuming that we are using net A/R ; meaning that we subtract the allowance for d/a)
Beginning 250,000
Minus 16,000
Plus 2,800,000
Minus 2,566,000
Plus 17,100
Ending 485,100 X 7% = 33,957

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