280 SECTION 1 The Role of Accounting as an Information System TopChop sells hairstyling franchises. TopChop receives $50,000 from a new franchisee for providing initial training, equipment and furnishings that have a stand-alone selling price of $50,000. TopChop also receives $30,000 per year for use of the TopChop name and for ongoing consulting services (starting on the date the franchise is purchased). Carlos became a TopChop franchisee on July 1, 2016, and on August 1, 2016, had completed training and was open for business. How much revenue in 2016 will TopChop recognize for its arrangement with Carlos? Dowell Fishing Supply, Inc., sold $50,000 of Dowell Rods on December 15, 2016, to Bassadrome. Because of a shipping backlog, Dowell held the inventory in Dowell’s warehouse until January 12, 2017 (having assured Bassadrome that it would deliver sooner if necessary). How much revenue should Dowell recognize in 2016 for the sale to Bassadrome? Kerianne paints landscapes, and in late 2016 placed four paintings with a retail price of $250 each in the Holmstrom Gallery. Kerianne’s arrangement with Holmstrom is that Holmstrom will earn a 20% commission on paintings sold to gallery patrons. As of December 31, 2016, one painting had been sold by Holmstrom to gallery patrons. How much revenue with respect to these four paintings should Kerianne recognize in 2016? GoodBuy sells gift cards redeemable for GoodBuy products either in store or online. During 2016, GoodBuy sold $1,000,000 of gift cards, and $840,000 of the gift cards were redeemed for products. As of December 31, 2016, $30,000 of the remaining gift cards had passed the date at which GoodBuy concludes that the cards will never be redeemed. How much gift card revenue should GoodBuy recognize in 2016? Holt Industries received a $2,000 prepayment from the Ramirez Company for the sale of new office furniture. Holt will bill Ramirez an additional $3,000 upon delivery of the furniture to Ramirez. Upon receipt of the $2,000 prepayment, how much should Holt recognize for a contract asset, a contract liability, and accounts receivable? As of December 31, 2016, Cady Construction has one construction job for which the construction in progress (CIP) account has a balance of $20,000 and the billings on construction contract account has a balance of $14,000. Cady has another construction job for which the construction in progress account has a balance of $3,000 and the billings on construction contract account has a balance of $5,000. Indicate the amount of contract asset and/or contract liability that Cady would show in its December 31, 2016, balance sheet. A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The company recognizes revenue over time according to percentage of completion. How much revenue and gross profit or loss will appear in the company’s income statement in the first year of the contract? Refer to the situation described in BE 5–27. During the first year the company billed its customer $7 million, of which $5 million was collected before year-end. What would appear in the year-end balance sheet related to this contract? Refer to the situation described in BE 5–27. The building was completed during the second year. Construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion? BE 5–21 Timing of revenue recognition; franchises ● LO5–7 BE 5–22 Timing of revenue recognition; bill-and-hold ● LO5–7 BE 5–23 Timing of revenue recognition; consignment ● LO5–7 BE 5–24 Timing of revenue recognition; gift card ● LO5–7 BE 5–25 Contract assets and contract liabilities ● LO5–8 BE 5–26 Contract assets and contract liabilities ● LO5–8, LO5–9 BE 5–27 Long-term contract; revenue recognition over time; profit recognition ● LO5–9 BE 5–28 Long-term contract; revenue recognition over time; balance sheet ● LO5–9 BE 5–29 Long-term contract; revenue recognition upon completion ● LO5–9
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