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Accounting 557 Essays

You are the Senior Accountant for the Patty Corporation which has several divisions. They each keep their own accounting books and have chosen the appropriate method of revenue recognition based on their operations. | | | | Pat’s Electronics Division|  | |  |  | Pat’s Electronics Division sells computers through agents in various cities. Agents send orders and down payments to our company. The division then ships the goods F. O. B. shipping point directly to the customers. Revenue is recognized at the point of sale. | | | | |  |  | Additional Financial Data:|  | Orders for fiscal year 2012| $ 3,000,000 |  | Down Payments collected in 2012| $ 300,000 |  | Billed and shipped in 2012| $ 2,400,000 |  | Freight billed in 2012| $ 70,000 |  | Commissions paid to Agents (after ship to customer)| 10%|  | Warranty Returns as % of Sales| 1%| |  |  | Pickle Construction Division|  | |  |  | The Pickle construction division was working on one project for the 2012 fiscal year. They use the percentage of completion revenue recognition method. | | | Contract for new administration building|  | | Total Contract Amount| $ 60,000,000 |  | Contract Grant Date| August 14, 2012| | Construction Began| September 1, 2012| |  |  | | Estimated Cost to Complete at beginning of contract| $ 52,000,000 |  | Estimated Time to Complete Project| 2 years| |  |  | As of Dec 31, 2012|  | | Construction Costs incurred to date| $ 14,140,000 |  | Billings to date| $ 19,500,000 |  | Expected costs to complete| $ 36,360,000 |  |  |  |
Peace Book Distribution Division|  | |  |  | Our book distribution division sells to national bookstores. Our division allows for up to 25% of sales in returns. For the past 4 years, returns have averaged 20%. We record revenue based on revenue recognition when the right of return exists. | | | | | Total Sales for 2012| $ 9,000,000 |  | Sales Still Available for return for six months| $ 2,000,000 |  | Actual Returns on Sales not returnable| 21%| | 2011 Sales collected in 2012| $ 2,500,000 |  | 2011 Sales returned in 2012| 19%|
Required:|  | | (a) We have studied several methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles. |  | – Point of sale. |  | | – Completion-of-production. |  | | – Percentage-of-completion. |  | | – Installment-sales. |  | | (b) Calculate the revenue to be recognized in fiscal year 2012 for each division of Patty Corporation in accordance with generally accepted accounting principles. Show all calculations for full credit. | Problem 1 Answer:
Pat’s Electronics Division Answer:|  |  | | Revenue for 2012|  | $ 2,400,000 | |  |  |  |  |  | | Notes:|  |  |  | |  | Revenue is the amount of goods shipped actually billed and shipped when revenue is recognized at the point of sale (F. O. B. shipping point). Orders and down payments are not Sales. Actual freight costs are expenses made by the seller that will be reimbursed by the buyer at the time of payment and are not revenue. Commissions and warranty returns are selling expenses and will be part of the income statement as operating expenses. |  |  | | |  | | |  | |  | | |  | | |  | | |  | | |  |  |  |  |  | Pickle Construction Division Answer:|  |  | | Contract Price|  | $ 60,000,000 | |  | Costs:|  |  | |  |  | Actual Costs to Date| $ 14,140,000 |  |  |  |  | Estimated Cost to Complete| $ 36,360,000 |  |  |  |  | Total Costs|  | $ 50,500,000 |  | Estimated Profit|  | $ 9,500,000 | |  |  |  |  |  | | Percentage of Contract Complete|  | 28%| |  |  | (Cost to date/Est total cost)|  |  | | Revenue to be Recognized in 2012|  | $ 16,800,000 |  |  |  | (Contract Rev * % complete)|  |  |  |  |  |  |  | Peace Book Distribution Answer:|  |  | | Sales for 2012|  | $ 9,000,000 | |  | Less: Sales Returns & Allowance|  | $ 1,800,000 |  | Net Sales (Revenue to be recognized in 2012)| $ 7,200,000 |  |  |  |  |  |  | | Notes:|  |  |  | |  | Collections of 2011 revenue have no impact on 2012 revenue recognition. Although distributors can return up to 25%, returns of 21% for 2011 show the estimate of 20% to be reasonable and should continue to be used. |  |  | | |  | | |  | | |  | | Problem 2: Curiosity Company|  | |  |  |
Curiosity Company provided the following financial information for its installment-sales for the current year. | | | Financial Data:|  | | Installment sales for current year| $ 800,000 |  | Cost of Goods Sold on installment basis| $ 600,000 |  | Payments by customers| $ 320,000 | | Repossessed Merchandise – Unpaid balances| $ 52,000 |  | Repossessed Merchandise – Estimated Value| $ 26,800 |  |  |  | Required:|  |  | | a) Prepare journal entries for the end of the year based on the information above. |  | | b) Prepare the entry to record the gross profit realized in the current year. |  | | Answer:|  |  |  |  | (a)| Installment Accounts Receivable| $ 800,000 |  |  |  | Installment Sales Revenue|  | $ 800,000 |  |  |  |  |  | | Cash|  | $ 320,000 |  | |  | Installment Accounts Receivable|  | $ 320,000 |  |  |  |  |  | | Cost of Installment Sales| $ 600,000 |  | |  | Inventory|  | $ 600,000 | |  |  |  |  | | Repossessed Merchandise| $ 26,800 |  | | Deferred Gross Profit *| $ 13,000 |  |  | Loss on Repossession **| $ 12,200 |  |  | Installment Accounts Receivable|  | $ 52,000 |  |  |  |  |  | |  | Rate of Gross Profit| $ 200,000 | 25%|  |  |  | $ 800,000 |  | |  |  |  |  | |  | *25% * $52000 =| $ 13,000 |  | |  | **[$26800 – ($52000 – $13000)]|  |  | |  |  |  |  | | Installment Sales Revenue| $ 800,000 |  | |  | Cost of Installment Sales|  | $ 600,000 |  |  | Deferred Gross Profit|  | $ 200,000 |  |  |  |  |  | (b)| Deferred Gross Profit| $ 80,000 |  | |  | Realized Gross Profit|  | $ 80,000 |

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