Question

1/ Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below:

Contract amount		$	3,270,000
Cost:	2017		1,260,000
	2018		660,000
Gross profit:	2017		890,000
	2018		460,000
Contract billings:	2017		1,635,000
	2018		1,635,000

ADH recognizes revenue upon completion of the contract.

What is the journal entry in 2018 to record revenue?

Multiple Choice

• Construction in progress	460,000
  Cost of construction	660,000
  Revenue from long-term contracts		1,120,000

• Accounts receivable	1,635,000
  Revenue from long-term contracts		1,635,000

• Construction in progress	1,350,000
  Cost of construction	1,920,000
  Revenue from long-term contracts		3,270,000

• Cost of construction	2,150,000
  Gross profit	1,120,000
  Revenue from long-term contracts		3,270,000

2/ On December 15, 2018, Rigsby Sales Co. sold a tract of land that cost $3,300,000 for $5,000,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $440,000 with the balance in two equal annual installments payable on December 15, 2019, and December 15, 2020. Ignore interest charges. Rigsby has a December 31 year-end.

In its December 31, 2018, balance sheet, Rigsby would report:

Multiple Choice

• Installment receivables (net) of $4,560,000.

• Installment receivables (net) of $3,009,600.

• Realized gross profit of $149,600.

• Deferred gross profit of $149,600

3/ Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2017, Lake began operations and sold jet skis with a total price of $750,000 that cost Lake $375,000. Lake collected $250,000 in 2017, $250,000 in 2018, and $250,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,200,000 that cost Lake $720,000. Lake collected $400,000 in 2018, $270,000 in 2019, and $270,000 in 2020 associated with those sales. In 2020, Lake also repossessed $260,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $97,500 at the time they were repossessed.

In 2017, Lake would recognize realized gross profit of:

Multiple Choice

• $0.

• $250,000.

• $375,000.

• $125,000.

4/ Indiana Co. began a construction project in 2018 with a contract price of $161 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $89 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.

Indiana:

Multiple Choice

• Recognized $72.00 million loss on the project in 2018.

• Recognized $36.00 million loss on the project in 2018.

• Recognized $10.37 million gross profit on the project in 2018.

• Recognized no gross profit or loss on the project in 2018.

Answer 1

a

Date

Account Title

Debit -$

Credit -$

1

Construction in Progress

460000

Cost of Construction

660000

Revenue from long term contracts

1120000

is the correct option for ADH to recognize 2018 revenue

b

Installment Receivables (Net) of $3009600

Basis

Particulars

Debit

Credit

Sale:-

Installment Receivables

$5,000,000

Inventory

$3,300,000

Deferred gross profit

$1,700,000

Payment:-

Cash

440000

Installment Receivables

440000

Deferred Gross profit

$149,600

Realized Gross profit

$149,600

Installment Receivables ($5,000,000 - $440,000) = $4,560,000

Deferred gross profit ($1,700,000 - $149,600) = $1550400

Installment Receivables (Net) = $3009600

c

Lake began operations and sold jet skis with a total price of $750000

that cost Lake $375000

Lake collected $250,000 in 2017

$250,000 in 2018

and $250,000 in 2019

so total cost of 375,000 is covered in the year 2017 and remainder what he received in the 2017 is part of profit only so

125,000 $ he recived Lake would recognize realized gross profit

So answer is $125000

d

Gross profit to be recognized each year under the Percentage of completion method = [(costs incurred till date / total estimated costs) * expected profit] - previously recognized profits.

Costs incurred till date in 2018 = 36

Total estimated costs in 2018 = 36 + 89 = 125

Expected profit in 2018 = 161 - 125 = 36

Previously recognized profits in 2018 = 0

Gross profit to be recognized in 2018 = (36 / 125 *36) - 0 = 10.37

Correct Answer is Recognized $10.37 million gross profit on project in 2018