318 SECTION 1 The Role of Accounting as an Information System uncollectible. Arens and Markal have a fiscal year-end of May 31. The revenue recognized by Arens and Associates on May 28 is a. $200,000 b. $800,000 c. $1,000,000 d. $0 An alternate exercise and problem set is available in the Connect library. Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for 2016. The following material items have not yet been considered in the computation of income: 1. The company sold equipment and recognized a gain of $50,000. The equipment had been used in the manufacturing process and was replaced by new equipment. 2. In December, the company received a settlement of $1,000,000 for a lawsuit it had filed based on antitrust violations of a competitor. The settlement was considered to be an unusual and infrequent event. 3. Inventory costing $400,000 was written off as obsolete. Material losses of this type were incurred twice in the last eight years. 4. It was discovered that depreciation expense on the office building of $50,000 per year was not recorded in either 2015 or 2016. In addition, you learn that included in revenues is $400,000 from installment sales made during the year. The cost of these sales is $240,000. At year-end, $100,000 in cash had been collected on the related installment receivables. Because of considerable uncertainty regarding the collectibility of receivables from these sales, the company’s accountant should have used the installment sales method to recognize revenue and gross profit on these sales. Also, the company’s income tax rate is 40% and there were 1 million shares of common stock outstanding throughout the year. Required: Prepare an income statement for 2016 beginning with income from continuing operations before income taxes. Include appropriate EPS disclosures. Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2016 and 2017 is as follows: Problems P 5–18 Income statement presentation; installment sales method (Chapters 4 and 5) P 5–19 Installment sales and cost recovery methods 2016 2017 Sales $300,000 $400,000 Cost of sales 180,000 280,000 Customer collections on: 2016 sales 120,000 100,000 2017 sales — 150,000 Required: 1. Calculate the amount of gross profit that would be recognized each year from installment sales. 2. Prepare all necessary journal entries for each year. 3. Repeat requirements 1 and 2 assuming that Ajax uses the cost recovery method to account for its installment sales. On August 31, 2016, the Silva Company sold merchandise to the Bendix Corporation for $500,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $100,000 due on each August 31, beginning August 31, 2017. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The book value of the merchandise on Silva’s books on the date of sale was $300,000. The perpetual inventory system is used. The company’s fiscal year-end is December 31. Required: 1. Prepare a table showing the amount of gross profit to be recognized in each of the five years of the installment sale applying each of the following methods: a. Point of delivery revenue recognition. P 5–20 Installment sales; alternative recognition methods
Spiceland_Inter_Accounting8e_Ch05
To see the actual publication please follow the link above