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CHAPTER 5 Revenue Recognition and Profitability Analysis 281 Franklin Construction entered into a fixed-price contract to build a freeway-connecting ramp for $30 million. Construction costs incurred in the first year were $16 million and estimated remaining costs to complete at the end of the year were $17 million. How much gross profit or loss will Franklin recognize in the first year if it recognizes revenue over time according to percentage of completion? What if instead Franklin recognizes revenue upon contract completion? Universal Calendar Company began the year with accounts receivable (net) and inventory balances of $100,000 and $80,000, respectively. Year-end balances for these accounts were $120,000 and $60,000, respectively. Sales for the year of $600,000 generated a gross profit of $200,000. Calculate the receivables and inventory turnover ratios for the year. The 2016 income statement for Anderson TV and Appliance reported sales revenue of $420,000 and net income of $65,000. Average total assets for 2016 was $800,000. Shareholders’ equity at the beginning of the year was $500,000 and $20,000 was paid to shareholders as dividends. There were no other shareholders’ equity transactions that occurred during the year. Calculate the profit margin on sales, return on assets, and return on shareholders’ equity for 2016. Refer to the facts described in BE 5–32. Show the DuPont framework’s calculation of the three components of the 2016 return on shareholders’ equity for Anderson TV and Appliance. During 2016, Rogue Corporation reported sales revenue of $600,000. Inventory at both the beginning and end of the year totaled $75,000. The inventory turnover ratio for the year was 6.0. What amount of gross profit did the company report in its 2016 income statement? BE 5–30 Long-term contract; revenue recognition; loss on entire project ● LO5–9 BE 5–31 Receivables and inventory turnover ratios ● LO5–10 BE 5–32 Profitability ratios ● LO5–10 BE 5–33 Profitability ratios ● LO5–10 BE 5–34 Inventory turnover ratio ● LO5–10 An alternate exercise and problem set is available in the Connect library. Access the FASB’s Accounting Standards Codification at the FASB website ( asc.fasb.org ). Required: Determine the specific citation for accounting for each of the following items: 1. What are the five key steps to applying the revenue recognition principle? 2. What are indicators that control has passed from the seller to the buyer, such that it is appropriate to recognize revenue at a point in time? 3. Under what circumstances can sellers recognize revenue over time? Ski West, Inc., operates a downhill ski area near Lake Tahoe, California. An all-day adult lift ticket can be purchased for $85. Adult customers also can purchase a season pass that entitles the pass holder to ski any day during the season, which typically runs from December 1 through April 30. Ski West expects its season pass holders to use their passes equally throughout the season. The company’s fiscal year ends on December 31. On November 6, 2016, Jake Lawson purchased a season pass for $450. Required: 1. When should Ski West recognize revenue from the sale of its season passes? 2. Prepare the appropriate journal entries that Ski West would record on November 6 and December 31. 3. What will be included in the Ski West 2016 income statement and balance sheet related to the sale of the season pass to Jake Lawson? Video Planet (“VP”) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and onsite installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900. Exercises E 5–1 FASB codification research ● LO5–1, LO5–2, LO5–3 CODE  E 5–2 Service revenue ● LO5–3 E 5–3 Allocating transaction price ● LO5–4


Spiceland_Inter_Accounting8e_Ch05
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