316 SECTION 1 The Role of Accounting as an Information System Richardson sells the integrated system for $45,000. Each of the components is shipped separately to the customer for the customer to install. Required: 1. Assume that each of the components can be used independently, even though Richardson sells them as an integrated system. How much revenue should be allocated to each component? 2. Now assume that the labeler, filler, and capper can’t be used in production without the conveyer, and that the conveyer is the last component installed. How much revenue should be recognized at the time the conveyer is installed? Assume the same facts as in E5–37, but that Richardson Systems reports under IFRS. How would your answers change? (Assume for requirement 2 that separate shipment is part of the normal course of Richardson’s operations, and successful customer installation is highly probable.) On October 1 , 2016, the Submarine Sandwich Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $300,000, Submarine will provide initial services to the franchisee to include assistance in design and construction of the building, help in training employees, and help in obtaining financing. Ten percent of the initial franchise fee is payable on October 1, 2016, with the remaining $270,000 payable in nine equal annual installments beginning on October 1, 2017. These installments will include interest at an appropriate rate. The franchise opened for business on January 15, 2017. Required: Assume that the initial services to be performed by Submarine Sandwich subsequent to October 1, 2016, are substantial and that collectibility of the installment receivable is reasonably certain. Substantial performance of the initial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries for the following dates (ignoring interest charges): 1. October 1, 2016 2. January 15, 2017 E 5–38 Multipledeliverable arrangements under IFRS IFRS E 5–39 Revenue recognition; franchise sales CPA and CMA Review Questions CPA Exam Questions The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study revenue recognition while preparing for the CPA examination. Determine the response that best completes the statements or questions. 9. Since there is no reasonable basis for estimating the degree of collectibility, Astor Co. uses the installment sales method of revenue recognition for the following sales: Installment method 2016 2017 Sales $600,000 $900,000 Collections from: 2016 sales 200,000 100,000 2017 sales — 300,000 Accounts written off: 2016 sales 50,000 150,000 2017 sales — 50,000 Gross profit percentage 30% 40% What amount should Astor report as deferred gross profit in its December 31, 2017, balance sheet for the 2016 and 2017 sales? a. $225,000 b. $150,000 c. $160,000 d. $250,000
Spiceland_Inter_Accounting8e_Ch05
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