Problem 6-10 (Algo) Long-term contract; revenue recognition over time [LO6-8, 6-9]

[The following information applies to the questions displayed below.]

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows:

Westgate recognizes revenue over time according to percentage of completion.

Problem 6-10 (Algo) Part 1

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years. (Do not round intermediate calculations. Loss amounts should be indicated with a minus sign.

2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

A company has developed a new type of mosquito repellant. The technical success is clear, but as with any new product the commercial success is risky. Because of this, they would sometimes test-market a product first, and then make a decision about national marketing after the test-market results had come in; at other times they would proceed directly to national marketing. On some occasions, they would abandon the product without even test-marketing it. The test-marketing would cost about $600,000. If successful (probability 0.4) there would be revenues of $200,000; if unsuccessful the revenues would only be $50,000. Should the test market be successful, a followup national campaign at a cost of $2,500,000 would have a 70% chance of success with a revenue of $9,000,000, otherwise it would be a failure with a revenue of $750,000. Should the test market be unsuccessful, a followup national campaign would have only a 0.2 chance of success (with the same cost, and the same revenues for success and failure). A national campaign not preceded by a test campaign would have a 45% chance of success. It would cost $3,000,000, and would produce a revenue of $9,500,000 if successful, but only $875,000 otherwise. (a) Draw and solve a decision tree for the situation (using payoff nodes where appropriate), and state the recommendation clearly. (b) If the $3,000,000 figure in the last paragraph were changed to $4,000,000, what would be the revised recommendation

John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in equity for his early
stage venture in January 2016. NewVenture is a subscription-based software company that has
experienced 75% revenue growth over the last year. The company generated $2.5 million of
revenue in 2015, with an operating loss of ($450,000). Thompson projects that NewVenture
will achieve $30 million in revenue by 2020. Samantha Jones of Gorsuch Capital is considering
an investment in January 2016, offering pre-money valuation of $14.75 million.
a. What is the post-money valuation of NewVenture?
b. What share of the company will Samantha Jones require?
c. The company has 1,000,000 shares outstanding before the investment. How many new
shares should she purchase, and at what price per share?

Samantha Jones believes Thompson will have to grant generous stock options in addition to
the salaries projected in his business plan. From experience, she thinks management should
have the ability to own at least a 15% share of the company in the form of options by the end
of year 5.

f. What share of the company should Samantha insist on getting today if an option pool is
created after her investment? (in order to ensure that she will still maintain the same
ownership level noted above)
g. How many shares are allocated to Jones and the option pool in this case?

Krishna only spends his money on clothes, c, and food, f. His utility function is quasilinear: U(f, c) = 10ln(f) + c. His income is $2000 per month. The price of clothes is $10 while the price of food is $5.

1. Derive his demand function for clothes and food. Given the prices and income, state quantity demanded of clothes and food.

2. Due to a new free trade agreement, the price of clothes falls to $5. What is the new quantity demanded of clothes and food? Are they substitutes or complements?

3. The price of both goods remain at $5 onwards. The economy is not doing well, and Krishna got a cut of 20% on his income. What is the quantity demanded of clothes and food after the paycheck cut? Do they change or remain the same? Why?

4. Draw Engel curve for food and clothes.

5. The government needs to raise tax revenues. It is debating between 3 options: 1) income tax of 20 %, 2) revenue-equivalent of quantity tax of tf on food, or 3) revenue-equivalent of quantity tax of tc on clothes. Find tf and tc that would raise the same amount of revenue with the income tax from Krishna?

6. Under which tax scheme would Krishna be the most well-off? Explain why in 2-3 sentences.

1. Cost, profit, and investment centers can all be classified as responsibility centers.T or F

2. Management decisions often include both financial and nonfinancial information. T or F

3. The total direct labor hours used for the direct labor budget comes from the: a.sales forecast. b.production budget. c. direct materials budget. d.sales budget.

4. Budgeting allows a service firm to a.hire professional staff to perform the budgeting work. b.coordinate professional staff needs with anticipated services. c.classify all personnel as either variable or fixed. d.budget expenditures before anticipated receipts.

5. Which of the following are the relevant costs in a special order decision? a.Variable costs b.Fixed costs c.Variable costs and fixed costs d.Variable costs and avoidable costs

6. Which of the following is important in the sell or process further decision? a.incremental revenue. b.incremental cost. c.both incremental revenue and incremental cost. d.neither incremental revenue nor incremental cost.

7. Order (1 to 5) the following budgets. Budget A.Sales B.Production C.Selling and administrative expense D.Capital expenditure budget E.Budgeted Balance Sheet

8. What is the return on investment for Las Sendas, Inc. for 2016 when: Sales:$2,000,000 Average operating assets:$4,000,000 Controllable margin:$600,000 a.60% b.50% c.30% d.15%

Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2021, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,480,000. The building was completed on December 31, 2023. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:

Required:
1. Compute gross profit or loss to be recognized as a result of this contract for each of the three years. Curtiss concludes that the contract does not qualify for revenue recognition over time.
2. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute gross profit or loss to be recognized in each of the three years.
3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2021 and 2022 as either cost in excess of billings or billings in excess of costs.

Corner Tavern is a small-town bar that sells only bottled beer. The average price of a bottle of beer at the tavern is $3.60 and the average cost of a bottle of beer to the tavern is $1.05. The tavern is open every night. One bartender and two to three waitresses are on duty each night. The fixed costs (salaries, rent, tax, utilities, etc.) total $275,000 per year. (Do not round intermediate calculations. Round the final answers to the nearest whole number.)  

a. The owner wishes to know how many bottles of beer the tavern must sell during the year to start making profit.

No. of bottles

b. What is the revenue at the break-even quantity found in the part a?

Revenue $

c. Not available in connect.

d. If Corner Tavern sells 115,000 bottles of beer a year, would it make a profit? (Hint: Draw the annual revenue and total annual cost vs. the number of bottles of beer sold per year. Make sure that the y-axis is to scale.)

• Yes

• No

e. The owner thinks $50,000 is a reasonable annual profit. How many bottles of beer should the tavern sell to make $50,000 profit?

No. of bottles           

f. An available option is to open the tavern earlier on the weekends. The attraction would be a discount of $0.60 off the regular price. The extra salaries of waitresses and bartender for the whole year are estimated to be $26,000. How many extra bottles of beer must the tavern sell in order to break-even in this option?

No. of extra bottles           

Chamberlain Enterprises Inc. reported the following receivables in its December 31, 2021, year-end balance sheet:

Additional Information:

1. The notes receivable account consists of two notes, a $55,000 note and a $225,000 note. The $55,000 note is dated October 31, 2021, with principal and interest payable on October 31, 2022. The $225,000 note is dated June 30, 2021, with principal and 6% interest payable on June 30, 2022.
2. During 2022, sales revenue totaled $1,360,000, $1,290,000 cash was collected from customers, and $24,000 in accounts receivable were written off. All sales are made on a credit basis. Bad debt expense is recorded at year-end by adjusting the allowance account to an amount equal to 10% of year-end accounts receivable.
3. On March 31, 2022, the $225,000 note receivable was discounted at the Bank of Commerce. The bank's discount rate is 8%. Chamberlain accounts for the discounting as a sale.

Required:
1. In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Chamberlain’s 2022 income statement?
2. & 3. What amounts will appear in the 2022 year-end balance sheet for accounts receivable and Calculate the receivables turnover ratio for 2022.

Using the adjusted trial balance below prepare the asset section of the balance by drag and dropping the appropriate word or number.

ABC Co.
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2019
              
        ADJUSTED TRIAL BALANCE
ACCOUNT TITLES       DEBIT ($)   CREDIT ($)
              
Accounts Payable         $ 23,800
Accounts Receivable      $ 23,600     
Accumulated depreciation - Vehicles         $ 30,000
Advertising Expense      $ 5,000     
Capital, Kory Lee         $ 367,500
Cash      $ 272,080     
Depreciation Expense      $ 5,400     
Gardening Revenue         $ 255,000
Gardening Supplies      $ 4,500     
Insurance Expense      $ 3,000     
Interest Revenue         $ 200
Internet Expense      $ 1,060     
Notes Payable         $ 10,000
Notes Receivable (Due within 13 months)      $ 5,000     
Prepaid Insurance      $ 8,000     
Supplies Expense      $ 1,340     
Telephone Expense      $ 1,120     
Unearned Revenue         $ 2,000
Utilities Expense      $ 3,000     
Vehicles      $ 135,000     
Wage Expense      $ 155,400     
Withdrawals - Kory Lee      $ 65,000     
              
       $ 688,500   $ 688,500

ABC CO.      
Balance Sheet      
As at December 31, 2019      
   
Assets:                  
Current assets:                  
Cash       $ 272,080  
Accounts Receivable   $ 23,600  
Prepaid Insurance   $ 8,000  
Gardening Supplies   $ 4,500  
Total Current Assets       $ 308,180
Non-Current Assets:                  
        Notes Receivable  
$ blank
  
           
blank                  
Vehicles       $ 135,000  
Less accumulated depreciation   $ [3]]   $ blank
           
Total assets:                   $ blank

5,000 Property, Plant & Equipmentt 30,000 105,000 418,180 129,600 No entry this is a current asset 5,400 Physical Property and Equipment 442,780 0 410,180

Feng Disc Golf Course was opened on March 1.

The following selected events and transactions occurred during March (amounts in thousands).

Mar. 1 Lee Feng invested￥20,000 cash in the business in exchange for ordinary shares.

     3 Purchased Rainbow Golf Land for￥15,000 cash. The price consists of land ￥12,000, building ￥2,000, and equipment ￥1,000. (Make one compound entry.)

5 Paid advertising expenses of ￥900

6 Paid cash ￥600 for a one-year insurance policy.

10 Purchased golf discs and other equipment for ￥1,050 from Wang Company payable in 30 days.

18 Received ￥1,100 in cash for golf fees (Feng records golf fees as service revenue).

19 Sold 150 coupon books for ￥10 each. Each book contains 4 coupons that enable the holder to play one round of disc golf.

25 Declared and paid a ￥800 cash dividend

30 Paid salaries of ￥250

30 Paid Wang Company in full

31 Received ￥2,700 cash for golf fees

Feng Disc Golf uses the following accounts: Cash, Prepaid Insurance, Land, Building, Equipment, Accounts payable, Unearned Service Revenue, Share Capital-Ordinary, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.

Instructions

Journalize the March transactions