ACCT 354 Lecture Notes - Lecture 3: Reserve Requirement, Income Statement, Cash Cash

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2 Dec 2016

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The cost recovery method defers recognition of income until the project is completed, therefore revenue and income will be lower during the early phases of the project. If the company underestimates the total costs revenue and income recognition will be advanced to earlier periods (it will look like more is complete) If the company overestimates the total cost it delays recognition. By changing the estimates for total costs the company can manage earnings. It reduces the shareholders" equity section and the value of the firm (as. Debt covenant would be worse (lower equity) assets leave the company) The issuance of more shares, usually < 25%, to existing shareholders. Reduces retained earnings and increases share capital. Firm value stays the same (value per share in the market falls) No effect on covenant (same total equity) much larger (>25%) than a stock dividend equity (value per share falls in the market) Number of shares outstanding is increased (or decreased) by an amount.

Related Questions

I. True/False 2 points

Indicate whether the sentence or statement is true or false.

____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.

____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.

____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.

____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.

____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.

____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.

____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.

____ 9. The cost recovery method is the most conservative revenue recognition method.

____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.

magentamink378

On January 11, 2013, ProsCo signed a $2.60 million contract to construct an office and warehouse for a small wholesale company. The project was originally expected to be completed in two years, but difficulties in hiring a sufficient pool of skilled workers extended the completion date by an extra year. As well, significant increases in the price of steel in the second year resulted in cost overruns on the project. ProsCo was able to negotiate a partial recovery of these costs, and the total contract value was adjusted to $3.20 million in the second year. Additional information from the project is as follows:

	2013	2014	2015
Total contract value	$2,600,00	$3,200,000	$3,200,000
Accumulated costs to date	528,000	2,160,000	3,700,000
Estimated costs to complete the project	1,672,000	1,440,000	0
Customer billings to date	300,000	2,000,000	3,200,000
Cash collected to date	100,000	2,000,000	3,200,000

(A) Calculate the amount of gross profit to be recognized each year using the percentage-of-completion method.

	2013	2014	2015
Gross profit (loss) for the year

(B) Prepare all the required journal entries for the year ended December 31, 2014.

Assume that the increase in material costs has created significant uncertainty for the contract.

(C) Using the zero-profit method (IFRS), determine the amount of revenue and expense to report each year.

	2013	2014	2015
Revenue
Expense

(D) Using the completed-contract method (ASPE), determine the amount of revenue and expense to report each year.

	2013	2014	2015
Revenue
Expense

crimsondinosaur336

Revenue Recognition - (Completed-Contract Method)

Dolphin Construction Company, Inc., entered into a firm fixed-price contract on October 1, 2014, to construct a three-storymedical building. At that time, Dolphin esti- mated that it wouldtake 2 to 3 years to complete the project. The total contract pricefor construction of the building is $8,000,000. Dolphinappropriately accounts for this contract under the completed-contract method in its financial statements and for income taxreporting. The building was deemed substantially completed onDecember 31, 2016. Estimated percentage of completion, accumulatedcontract costs incurred, estimated costs to complete the contract,and accumulated billings to under this contract are shownbelow.

	At December 31, 2014	At December 31, 2015	At December 31, 2016
Percentage of completion	20%	60%	100%
Contract costs incuured	$1,400,000	$4,920,000	$8,100,000
Estimated costs to complete the contract	$6,600,000	$3,280,000	-0-
Billings	$1,000,000	$4,500,000	$7,800,000

Instructions

(a) Prepare schedules to compute the amount to be shownuncompleted contract in excess of related billingsâ or âBillings onuncompleted contract in excess of related costsâ at December 31,2014, 2015, and 2016. (Ignore income taxes.) Show supportingcomputations in good form. $6,600,000 $1,000,000 $4,500,000$3,280,000 as âCost of uncompleted contract in excess of relatedbillings" or "Billings on uncompleted contract in excess of relatedcosts" at December 31, 2014, 2015, and 2016. (Ignore income taxes).Show supporting computations in good form.

(b) Prepare schedules to compute the profit or loss to berecognized as a result of this contract for the years endedDecember 31, 2014, 2015, and 2016. (Ignore income taxes.) Showsupporting computations in good form.

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ACCT 354 Lecture Notes - Lecture 3: Reserve Requirement, Income Statement, Cash Cash

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