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    Intermediate Accouting - Construction related

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    Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

    A. Service revenue
    B. Deferred Service Revenue
    C. A reduction in installment accounts receivable
    D. A direct addition to retained earnings

    2. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

    A. The terms of payment in the contract.
    B. The degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
    C. The method commonly used by the contractor to account for other long-term construction contracts.
    D. The inherent nature of the contractor's technical facilities used in construction.

    3. Melton Construction Co. began operations in 2007. Construction activity for 2007 is shown below. Melton uses the completed-contract method.

    Billings Collections Estimated
    Contract Through Through Costs to Costs to
    Contract Price 12/31/07 12/31/07 12/31/07 Complete

    1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 $ -0-

    2 3,600,000 1,500,000 1,000,000 820,000 1,880,000

    3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000

    Which of the following should be shown on the balance sheet at December 31, 2007 related to Contract 2?

    A. Inventory, $680,000
    B. Inventory, $820,000
    C. Current liability, $680,000
    D. Current liability, $1,500,000

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    Solution Summary

    The solution answer 3 questions related to construction accounting.