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Long term contract accounting practice problems

1. An alternative available when the seller is exposed to continued risks of ownership through return of the product is

Recording the sale, and accounting for returns as they occur in future periods.
Not recording a sale until all return privileges have expired.
Recording the sale, but reducing sales by an estimate of future returns.
All of the above.

2. The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those necessary conditions?

Estimates of progress toward completion, revenues, and costs are reasonably dependable.
The contractor can be expected to perform the contractual obligation
The buyer can be expected to satisfy some of the obligations under the contract.
The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

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?

Inventory, $680,000
Inventory, $820,000
Current liability, $680,000
Current liability, $1,500,000

2-1. Smiley Corporation purchased a machine on January 2, 2006, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes:
2006 $400,000 2009 $230,000
2007 640,000 2010 230,000
2008 384,000 2011 116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2007, should be
Deferred Tax Liability
Current Noncurrent
a. $0 $72,000
b. $ 4,800 $67,200
c. $67,200 $ 4,800
d. $72,000 $ 0
A
B
C
D

3-1. The following information relates to Eckert, Inc.'s defined benefit pension plan at Dec 31, 2007:
Plan assets at fair value......................4,000,000
Projected benefit obligation.................4,700,000
Funded Status of pension plan............ (700,000)
Unrecognized net actuarial loss........... 400,000
Unrecognized prior service cost............ 200,000
Accrued pension liability on books........(100,000)
The following information relates to Eckert, Inc.'s defined benefit pension plan for the year 2008:
Service cost.....................................................220,000
Interest expense...............................................270,000
Actual return on plan assets..............................480,000 gain
Expected return on plan assets..........................320,000
Contributions to plan.........................................200,000
Benefits paid....................................................100,000
Amortization of unrecognized net actuarial loss... 30,000
Amortization of unrecognized prior service cost... 40,000
Required: Ignoring both any accumulated benefit obligation considerations and any FAS 158 considerations, answer the following questions.
a. What is the fair value of the plan assets at Dec 31, 2008? (Show buildup)
b. What is the projected benefit obligation at Dec 31, 2008? (Show buildup)
c. What is pension expense for 2008? (Show buildup)
d. Make the journal entry(s) on the books for 2008 related to pensions.
2. Market-related asset value is used to determine the corridor and to calculate the expected return on plan assets.
Expected Return
Corridor in Plan Assets
a. Yes Yes
b. Yes No
c. No Yes
d. No No

A
B
C
D

4-1. For a sales-type lease
The sales price includes the present value of the unguaranteed residual value.
The present value of the guaranteed residual value is deducted to determine the cost of goods sold.
The gross profit will be the same whether the residual value is guaranteed or unguaranteed.
None of the above.

2. In the earlier years of a lease, from the lessee's perspective, the use of the

Capital method will enable the lessee to report higher income, compared to the operating method.
Capital method will cause debt to increase, compared to the operating method.
Operating method will cause income to decrease, compared to the capital method.
Operating method will cause debt to increase, compared to the capital method.

3. Mayer Company leased equipment from Lennon Company on July 1, 2008, for an eight-year period expiring June 30, 2016. Equal annual payments under the lease are $300,000 and are due on July 1 of each year. The first payment was made on July 1, 2008.
The rate of interest contemplated by Mayer and Lennon is 8%. The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Lennon's accounting records was $1,650,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by Lennon, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2008?
$0 and $0
$0 and $62,475
$211,875 and $62,475
$211,875 and $74,475

Solution Summary

Approach, process and computations given.

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