Exam III Review ACC 3023 Spring, 2011 10 Problems (No Multiple-Choice) PLEASE! Show your work! 1. Chapter 10. Exchange of assets: Computation and write journal entries Practice problems: Brief...

Exam III Review
ACC 3023
Spring, 2011
10 Problems (No Multiple-Choice)
PLEASE! Show your work!
1. Chapter 10.

• Exchange of assets: Computation and write journal entries

Practice problems:
Brief Exercises: 10-8 to 10-12
BRIEF EXERCISE 10-8

Equipment.....................................................	3,300
Accumulated Depreciation—Trucks............	18,000
Trucks...................................................	20,000
Cash......................................................	500
Gain on Disposal of Trucks.................	800

BRIEF EXERCISE 10-9

Equipment ($3,300 – $800)...........................	2,500
Accumulated Depreciation—Trucks............	18,000
Trucks...................................................	20,000
Cash......................................................	500

BRIEF EXERCISE 10-10

Equipment.....................................................	5,000
Accumulated Depreciation—Machinery......	3,000
Loss on Disposal of Machinery....................	4,000
Machinery.............................................	9,000
Cash......................................................	3,000

BRIEF EXERCISE 10-11

Trucks (new)..................................................	37,000
Accumulated Depreciation—Trucks............	27,000
Loss on Disposal of Trucks..........................	2,000
Trucks (used).......................................	30,000
Cash......................................................	36,000

BRIEF EXERCISE 10-12

Trucks (new)..................................................	35,000
Accumulated Depreciation—Trucks............	17,000
Loss on Disposal of Trucks..........................	1,000
Trucks (used).......................................	20,000
Cash......................................................	33,000

Exercises: 10-17 to 10-20
EXERCISE XXXXXXXXXX–15 minutes)

Alatorre Corporation
Machinery ($320 + $85)................................	405
Accumulated Depreciation—Machinery......	140
Loss on Disposal of Machinery....................	65*
Machinery.............................................	290
Cash......................................................	320

*Computation of loss:
Book value of old machine ($290 – $140)	$150
Less: Fair value of old machine	85
Loss on exchange	$ 65

Mills Business Machine Company
Cash........................................................................ ................................................................................	320
Inventory.................................................................	85
Cost of Goods Sold................................................	270
Sales Revenue...............................................	405
Inventory........................................................	270

EXERCISE XXXXXXXXXX–25 minutes)

(a)	Exchange has commercial substance:
Depreciation Expense...................................	800
Accumulated Depreciation— Equipment.........................................	800
($12,700 – $700 = $12,000;
$12,000 ÷ 5 = $2,400;
$2,400 X 4/12 = $800)
Equipment.....................................................	15,200**
Accumulated Depreciation—Equipment.....	8,000
Gain on Disposal of Equipment..........	500*
Equipment............................................	12,700
Cash......................................................	10,000

EXERCISE XXXXXXXXXXContinued)

*Cost of old asset	$12,700
Accumulated depreciation ($7,200 + $800)	(8,000)
Book value	4,700
Less: Fair value of old asset	5,200
Gain on disposal of equipment	$ 500
**Cash paid	$10,000
Fair value of old equipment	5,200
Cost of new equipment	$15,200

(b)	Exchange lacks commercial substance:
Depreciation Expense...................................	800
Accumulated Depreciation—Equipment.....................................................	800
Equipment.....................................................	15,200**
Accumulated Depreciation—Equipment.....	8,000
Gain on Disposal of Equipment..........	500
Equipment............................................	12,700
Cash......................................................	10,000

**Cash paid	$10,000
Fair value of old asset	5,200
Cost of new asset	$15,200

Note that the entries are the same for both (a) and (b). The gain is not deferred because cash boot is greater than 25%, which makes the transaction mone­tary in nature.
EXERCISE XXXXXXXXXX–20 minutes)
(a) Exchange lacks commercial substance.

Santana Company:
Equipment.....................................................	11,000
Accumulated Depreciation—Equipment.....	19,000
Equipment............................................	28,000
Cash......................................................	2,000

Valuation of equipment
Book value of equipment given	$ 9,000
Cash paid	2,000
New equipment	$11,000

OR

Fair value received	$15,500
Less: Gain deferred	4,500*
New equipment	$11,000
*Fair value of old equipment	$13,500
Book value of old equipment	(9,000)
Gain on disposal of equipment	$ 4,500

Note: Cash paid is less than 25%, the transaction is nonmonetary, so the gain is deferred.

Delaware Company:
Cash.......................................................................... ..................................................................................	2,000
Equipment................................................................	13,500
Accumulated Depreciation—Equipment................	10,000
Loss on Disposal of Equipment..............................	2,500*
Equipment.......................................................		28,000
*Computation of loss:
Book value of old equipment	$18,000
Fair value of old equipment	15,500
Loss on disposal of equipment	$ 2,500

EXERCISE XXXXXXXXXXContinued)

(b)	Exchange has commercial substance
Santana Company
Equipment.....................................................	15,500*
Accumulated Depreciation—Equipment.....	19,000
Equipment............................................	28,000
Cash......................................................	2,000
Gain on Disposal of Equipment..........	4,500**

*Cost of new equipment:
Cash paid	$ 2,000
Fair value of old equipment	13,500
Cost of new equipment	$15,500

**Computation of gain on disposal of equipment:
Fair value of old equipment	$13,500
Less: Book value of old equipment ($28,000 – $19,000)	9,000
Gain on disposal of equipment	$ 4,500

Delaware Company
Cash........................................................................ ................................................................................	2,000
Equipment..............................................................	13,500*
Accumulated Depreciation—Equipment (Old).....	10,000
Loss on Disposal of Equipment............................	2,500**
Equipment.....................................................	28,000

*Cost of new equipment:
Fair value of equipment	$15,500
Less: Cash received	2,000
Cost of new equipment	$13,500

**Computation of loss on disposal of equipment:
Book value of old equipment ($28,000 – $10,000)	$18,000
Less: Fair value of equipment (Old)	15,500
Loss on disposal of equipment	$ 2,500

EXERCISE XXXXXXXXXX–20 minutes)

(a)	Exchange has commercial substance
Equipment....................................................	53,900
Accumulated Depreciation—Equipment....	20,000*
Gain on Disposal of Equipment..........	3,800
Equipment...........................................	62,000
Cash ($7,000 + $1,100)........................	8,100

*$62,000 – $42,000.
Valuation of equipment

Cash	$ 7,000
Installation cost	1,100
Market value of used equipment	45,800
Cost of new equipment	$53,900

Computation of gain

Cost of old asset	$62,000
Accumulated depreciation	20,000
Book value	42,000
Less: Fair value of old asset	45,800
Gain on disposal of equipment	$ 3,800

(b)	Fair value not determinable
Equipment.....................................................	50,100*
Accumulated Depreciation—Equipment.....	20,000
Equipment............................................	62,000
Cash......................................................	8,100

*Basis of new equipment

Book value of old equipment	$42,000
Cash paid (including installation costs)	8,100
Basis of new equipment	$50,100

Problems on handout in the Chapter 10 file
Problems that we worked in class
2. Chapter 11.

• Depreciation methods computation and write journal entries

a. Declining balance
b. Sum-of-the-years’-digits
c. Units of output

• Depreciation in partial periods computation and write journal entries

a. Straight-line
b. Declining balance
c. Sum-of-the-years’-digits
Practice problems:
Brief Exercises: 11-1, 11-3, 11-4
BRIEF EXERCISE 11-1

2012:	($50,000 – $2,000) X 23,000	= $6,900
160,000

2013:	($50,000 – $2,000) X 31,000	= $9,300
160,000

BRIEF EXERCISE 11-2

(a)	$80,000 – $8,000	= $9,000
8

(b)	$80,000 – $8,000	X 4/12 = $3,000
8

BRIEF EXERCISE 11-3
(a) ($80,000 – $8,000) X 8/36* = $16,000
(b) [($80,000 – $8,000) X 8/36] X 9/12 = $12,000
*[8(8 + 1)] ÷ 2
BRIEF EXERCISE 11-4
(a) $80,000 X 25%* = $20,000
(b) ($80,000 X 25%) X 3/12 = $5,000
*(1/8 X 2)
Exercises: 11-2 through 11-7
EXERCISE XXXXXXXXXX–25 minutes)
(a) If there is any salvage value and the amount is unknown (as is the case here), the cost would have to be determined by looking at the data for the double-declining balance method.

100%	= 20%; 20% X 2 = 40%
5

Cost X 40% = $20,000
$20,000 ÷ .40 = $50,000 Cost of asset
EXERCISE 11-2 (Continued)
(b) $50,000 cost [from (a)] – $45,000 total depreciation = $5,000 salvage value.
(c) The highest charge to income for Year 1 will be yielded by the double-declining-balance method.
(d) The highest charge to income for Year 4 will be yielded by the straight- line method.
(e) The method that produces the highest book value at the end of Year 3 would be the method that yields the lowest accumulated depreciation at the end of Year 3, which is the straight-line method.
Computations:
St.-line = $50,000 – ($9,000 + $9,000 + $9,000) = $23,000 book value, end of Year 3.
S.Y.D. = $50,000 – ($15,000 + $12,000 + $9,000) = $14,000 book value, end of Year 3.
D.D.B. = $50,000 – ($20,000 + $12,000 + $7,200) = $10,800 book value, end of Year 3.
(f) The method that will yield the highest gain (or lowest loss) if the asset is sold at the end of Year 3 is the method which will yield the lowest book value at the end of Year 3, which is the double-declining balance method in this case.
EXERCISE XXXXXXXXXX–20 minutes)

(a)	XXXXXXXXXX)	= 210
2

3/4 X 20/210 X ($774,000 – $60,000) = $51,000 for 2012

1/4 X 20/210 X ($774,000 – $60,000)	=	$17,000
+	3/4 X 19/210 X ($774,000 – $60,000)	=	48,450
$65,450	for 2013

EXERCISE 11-3 (Continued)

(b)	100%	= 5%; 5% X 2 = 10%
20

3/4 X 10% X $774,000 = $58,050 for 2012
10% X ($774,000 – $58,050) = $71,595 for 2013
EXERCISE XXXXXXXXXX–25 minutes)
(a) $279,000 – $15,000 = $264,000; $264,000 ÷ 10 yrs. = $26,400
(b) $264,000 ÷ 240,000 units = $1.10; 25,500 units X $1.10 = $28,050
(c) $264,000 ÷ 25,000 hours = $10.56 per hr.; 2,650 hrs. X $10.56 = $27,984

(d)	XXXXXXXXXX XXXXXXXXXX = 55 OR	n(n + 1)	=	10(11)	= 55
2	2

10	X $264,000 X 1/3 =	$16,000
55

9	X $264,000 X 2/3 =	28,800
55
Total for 2013	$44,800

(e)	$279,000 X 20% X 1/3 =	$18,600
[$279,000 – ($279,000 X 20%)] X 20% X 2/3 =	29,760
Total for 2013	$48,360

[May also be computed as 20% of ($279,000 – 2/3 of 20% of $279,000)]
EXERCISE XXXXXXXXXX–25 minutes)

(a)	($150,000 – $24,000)	= $25,200/yr. = $25,200 X 5/12 = $10,500
5

2012 Depreciation—Straight line = $10,500

(b)	($150,000 – $24,000)	= $6.00/hr.
21,000

2012 Depreciation—Machine Usage = 800 X $6.00 = $4,800

(c)	Machine	Allocated to
Year	Total	2012		2013
1	5/15 X $126,000 = $42,000	$17,500*	$24,500**
2	4/15 X $126,000 = $33,600		14,000***
	$17,500		$38,500
*	$42,000 X 5/12 = $17,500
**	$42,000 X 7/12 = $24,500
***	$33,600 X 5/12 = $14,000

2013 Depreciation—Sum-of-the-Years’-Digits = $38,500
(d XXXXXXXXXX% X ($150,000) X 5/12 = $25,000
XXXXXXXXXX% X ($150,000 – $25,000) = $50,000
OR
1^st full year (40% X $150,000) = $60,000
2^nd full year [40% X ($150,000 – $60,000)] = $36,000

2012 Depreciation =	5/12 X $60,000 =	$25,000
2013 Depreciation =	7/12 X $60,000 =	$35,000
5/12 X $36,000 =	15,000
$50,000

EXERCISE XXXXXXXXXX–30 minutes)

(a)	2012	Straight-line	$304,000 – $16,000	= $36,000/year
8
3 months—Depreciation ($36,000 X 3/12) = $9,000

(b)	2012	Output	$304,000 – $16,000	= $7.20/output unit
40,000
1,000 units X $7.20 = $7,200

(c)	2012	Working hours	$304,000 – $16,000	= $14.40/hour
20,000
525 hours X $14.40 = $7,560

(d)	XXXXXXXXXX XXXXXXXXXX = 36 OR	n(n + 1)	=	8(9)	= 36
2	2

Allocated to
Sum-of-the-years’-digits	Total	2012	2013	2014
Year 1	8/36 X $288,000 =	$64,000	$16,000	$48,000
2	7/36 X $288,000 =	$56,000	14,000	$42,000
3	6/36 X $288,000 =	$48,000	12,000
$16,000	$62,000	$54,000

2014: $54,000 = (9/12 of 2^nd year of machine’s life plus 3/12 of 3^rd year of machine’s life)
(e) Double-declining-balance 2013: 1/8 X 2 = 25%.
2012: 25% X $304,000 X 3/12 = $19,000
2013: 25% X ($304,000 – $19,000) = $71,250
OR
1^st full year (25% X $304,000) = $76,000
EXERCISE 11-6 (Continued)
2^nd full year [25% X ($304,000 – $76,000)] = $57,000
2012 Depreciation 3/12 X $76,000 = $19,000
2013 Depreciation 9/12 X $76,000 = $57,000
3/12 X $57,000 = 14,250
$71,250
EXERCISE XXXXXXXXXX–35 minutes)
Methods of Depreciation

Description	Date Purchased	Cost	Salvage	Life	Method	Accum. Depr. to 2012	2013 Depr.
A	2/12/11	$159,000	$16,000	10	(a) SYD	$37,700	(b) $22,100
B	8/15/10	(c) 79,000	21,000	5	SL	29,000	(d) 11,600
C	7/21/09	88,000	28,500	8	DDB	(e) 55,516	(f) 3,984
D	(g) 10/12/11	219,000	69,000	5	SYD	70,000	(h) 35,000

Machine A—Testing the methods

(a) Straight-Line Method for 2011	$ 7,150	[($159,000 – $16,000) ÷ 10] X 1/2
Straight-Line Method for 2012	$14,300
Total Straight Line	$21,450

Double-Declining-Balance for 2011	$15,900	($159,000 X .2 X .5)
Double-Declining-Balance for 2012	$28,620	[($159,000 – $15,900) X .2]
Total Double Declining Balance	$44,520

Sum-of-the-Years-Digits for 2011	$13,000	[($159,000 – $16,000) X 10/55 X .5]
Sum-of-the-Years-Digits for 2012	$24,700	($143,000 X 10/55 X 1/2) + ($143,000 X 9/55 X .5)
Total Sum-of-the-Years-Digits	$37,700

Method used must be	SYD
(b) Using SYD, 2013 Depreciation is	$22,100	($143,000 X 9/55 X 1/2) + ($143,000 X 8/55 X .5)

EXERCISE 11-7 (Continued)
Machine B—Computation of the cost
(c) Asset has been depreciated for 2 1/2 years using the straight-line method.
Annual depreciation is then equal to $29,000 divided by 2 1/2 or $11,600.
11,600 times 5 plus the salvage value is equal to the cost.
Cost is $79,000 [($11,600 X 5) + $21,000].
(d) Using SL, 2013 Depreciation is $11,600.
Machine C—Using the double-declining-balance method of depreciation

(e) 2009’s depreciation is	$11,000	($88,000 X .25 X .5)
2010’s depreciation is	$19,250	($88,000 – $11,000) X .25
2011’s depreciation is	$14,438	($88,000 – $30,250) X .25
2012’s depreciation is	$10,828	($88,000 – $44,688) X .25
Accumulated Depreciation at 12/31/12	$55,516

(f) Using DDB, 2013 Depreciation is $8,121 [($88,000 – $55,516) X 0.25]

Machine D—Computation of Year Purchased

(g) First Half Year using SYD =	$25,000	[($219,000 – $69,000) X 5/15 X .5]
Second Year using SYD =	$45,000	($150,000 X 5/15 X .5) + ($150,000 X 4/15 X .5)
	$70,000
Thus the asset must have been purchased on October 12, 2011
(h) Using SYD, 2013 Depreciation is	$35,000	($150,000 X 4/15 X .5) + ($150,000 X 3/15 X .5)

Problems that we worked in class
3. Chapter 12.

• Intangible assets

a. Amortize
b. Impair

• Goodwill

a. Record
b. Impair
Practice Problems:
Brief exercises: 12-1 through 12-9
BRIEF EXERCISE 12-1

Patents............................................................................	54,000
Cash.......................................................................	54,000
Amortization Expense.....................................................	5,400
Patents ($54,000 X 1/10 = $5,400).......................	5,400

BRIEF EXERCISE 12-2

Patents............................................................................	24,000
Cash.......................................................................	24,000
Amortization Expense.....................................................	8,400
Patents [($43,200 + $24,000) X 1/8 = $8,400]......	8,400

BRIEF EXERCISE 12-3

Trade Names..............................................................	68,000
Cash..................................................................	68,000
Amortization Expense...............................................	8,500
Trade Names ($68,000 X 1/8 = $8,500)...........	8,500

BRIEF EXERCISE 12-4

Franchises...................................................................	120,000
Cash..................................................................	120,000
Amortization Expense................................................	11,250
Franchises ($120,000 X 1/8 X 9/12 = $11,250)	11,250

BRIEF EXERCISE 12-5

Purchase price.................................................	$700,000
Fair value of assets..........................................	$800,000
Fair value of liabilities.....................................	200,000
Fair value of net assets....................................	600,000
Value assigned to goodwill.............................	$100,000

BRIEF EXERCISE 12-6

Loss on Impairment.......................................	190,000
Patents ($300,000 – $110,000)............	190,000

Note: An impairment has occurred because expected net future cash flows ($210,000) are less than the carrying amount ($300,000). The loss is measured as the difference between the carrying amount and fair value ($110,000).
BRIEF EXERCISE 12-7
Because the fair value of the division exceeds the carrying amount of the assets, goodwill is not considered to be impaired. No entry is necessary.
BRIEF EXERCISE 12-8

Loss on Impairment ($400,000 – $350,000).......	50,000
Goodwill...................................................	50,000

The fair value of the reporting unit ($750,000) is less than the carrying value ($800,000)—an impairment has occurred. The loss is the difference between the recorded goodwill and the implied goodwill.
BRIEF EXERCISE 12-9

Organization Expense................................................	60,000
Cash..................................................................	60,000

Exercises: 12-3, 12-4, 12-6, 12-9 – 12-15
EXERCISE XXXXXXXXXX–15 minutes)

(a)	Trademarks.................................................................	$20,000
Excess of cost over fair value of net identifiable
assets of acquired subsidiary (goodwill).................	75,000
Total intangible assets................................................	$95,000

(b) Organization costs, $24,000, should be expensed.
Discount on bonds payable, $35,000, should be reported as a contra account to bonds payable in the long-term liabilities section.
Deposits with advertising agency for ads to promote goodwill of company, $10,000, should be reported either as an expense or as prepaid advertising in the current assets section. Advertising costs in general are expensed when incurred or when first used.
Cost of equipment acquired for research and development projects, $90,000, should be reported with property, plant, and equipment, because the equipment has an alternative use.
Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years, $70,000, should be classified as research and development expense on the income statement.
EXERCISE XXXXXXXXXX–20 minutes)
1. Palmiero should report the patent at $900,000 (net of $600,000 accumulated amortization) on the balance sheet. The computation of accumulated amortization is as follows.

Amortization for 2010 and 2011 ($1,500,000/10) X 2....................................	$300,000
2012 amortization: ($1,500,000 – $300,000) ÷ (6 – 2)......................................	300,000
Accumulated amortization, 12/31/12......	$600,000

2. Palmiero should amortize the franchise over its estimated useful life. Because it is uncertain that Palmiero will be able to retain the franchise at the end of 2020, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2012, is $35,000: ($350,000/10).
3. These costs should be expensed as incurred. Therefore $275,000 of organization expense were reported in income for 2010 with none expensed in 2012.
4. Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods
EXERCISE XXXXXXXXXX–20 minutes)

Patents............................................................................	380,000
Goodwill..........................................................................	360,000
Franchises........................................................................	450,000
Copyrights.......................................................................	156,000
Research and Development Expense.............................	215,000
Intangible Assets...................................................	1,561,000
Amortization Expense.....................................................	83,000
Patents ($380,000/8)............................................	47,500
Franchises ($450,000/10 X 6/12)..........................	22,500
Copyrights ($156,000/5 X 5/12)...........................	13,000

Balance of Intangible Assets as of December 31, 2012
Patents = $380,000 – $47,500 = $332,500
Goodwill = $360,000 (no amortization)
Franchises = $450,000 – $22,500 = $427,500
Copyrights = $156,000 – $13,000 = $143,000
EXERCISE XXXXXXXXXX–20 minutes)

(a) DEVON HARRIS COMPANY
Intangibles Section of Balance Sheet
December 31, 2012
Patent from Bradtke Company, net of accumulated amortization of $700,000 (Schedule 1)....................	$1,800,000
Franchise from Greene Company, net of accumulated amortization of $58,000 (Schedule 2)......................	522,000
Total intangibles..........................................................	$2,322,000

Schedule 1 Computation of Patent from Bradtke Company
Cost of patent at date of purchase..................................	$2,500,000
Amortization of patent for 2011 ($2,500,000 ÷ 10 years)................................................................................	(250,000)
2,250,000
Amortization of patent for 2012 ($2,250,000 ÷ 5 years).	(450,000)
Patent balance.................................................................	$1,800,000
Schedule 2 Computation of Franchise from Greene Company
Cost of franchise at date of purchase..............................	$ 580,000
Amortization of franchise for 2012 ($580,000 ÷ 10).......	(58,000)
Franchise balance.............................................................	$ 522,000

EXERCISE 12-9 (Continued)

(b) DEVON HARRIS COMPANY
Income Statement Effect
For the Year Ended December 31, 2012
Patent from Bradtke Company:
Amortization of patent for 2012
($2,250,000 ÷ 5 years).....................	$ 450,000
Franchise from Greene Company:
Amortization of franchise for 2012
($580,000 ÷ 10)................................	$ 58,000
Payment to Greene Company
($2,500,000 X 5%)............................	125,000	183,000
Research and development costs.............	433,000
Total charged against income...........	$1,066,000

Note to instructor: This solution only shows the expense effects. Revenue under the franchise is $2,500,000.
EXERCISE XXXXXXXXXX–20 minutes)

(a)	2009	Research and Development Expense.............................	170,000
Cash.......................................................................	170,000
Patents............................................................................	24,000
Cash.......................................................................	24,000
Amortization Expense.....................................................	600
Patents [($24,000 ÷ 10) X 3/12]............................	600
2010	Amortization Expense.....................................................	2,400
Patents ($24,000 ÷ 10)..........................................	2,400

EXERCISE XXXXXXXXXXContinued)

(b)	2011	Patents............................................................................	12,400
Cash.......................................................................	12,400
Amortization Expense.....................................................	2,575
Patents ($1,000 + $1,575).....................................	2,575
[Jan. 1–June 1: ($24,000 ÷ 10) X
5/12 = $1,000
June 1–Dec. 31: ($24,000 – $600 –
$2,400 – $1,000 + $12,400) = $32,400;
($32,400 ÷ 12) X 7/12 = $1,575]
2012	Amortization Expense.....................................................	2,700
Patents ($32,400 ÷ 12)..........................................	2,700
(c)	2013 and 2014
Amortization Expense.....................................................	14,063
Patents ($28,125 ÷ 2)............................................	14,063
($32,400 – $1,575 – $2,700) = $28,125

EXERCISE 12-11

(a)	Patent A
Life in years..................................................	17
Life in months (12 X 17)..........................................	204
Amortization per month ($40,800 ÷ 204)..............	$200
Number of months amortized to date
	Year	Month
	2008	10
	2009	12
	2010	12
	2011	12
	46

Book value 12/31/11 $31,600: ($40,800 – [46 X $200])
EXERCISE XXXXXXXXXXContinued)

Patent B
Life in years..............................................................	10
Life in months (12 X 10)...........................................	120
Amortization per month ($15,000 ÷ 120)...............	$125
Number of months amortized to date
	Year	Month
	2009	6
	2010	12
	2011	12
	30

Book value 12/31/11 $11,250: ($15,000 – [$125 X 30])

Patent C
Life in years..............................................................	4
Life in months (12 X 4).............................................	48
Amortization per month ($14,400 ÷ 48).................	$300
Number of months amortized to date
	Year	Month
	2010	4
	2011	12
	16

Book value 12/31/11 $9,600: ($14,400 – [$300 X 16])
At December 31, 2011

Patent A...........................................................	$31,600
Patent B...........................................................	11,250
Patent C............................................................	9,600
Total...........................................................................	$52,450

(b) Analysis of 2012 transactions
1. The $245,700 incurred for research and development should be expensed.
EXERCISE XXXXXXXXXXContinued)
2. The book value of Patent B is $11,250 and its estimated future cash flows are $6,000: (3 X $2,000); therefore Patent B is impaired. The impairment loss is imputed as follows:

Book value..............................................	$11,250
Less: Present value of future
cash flows ($2,000 X XXXXXXXXXX)...	5,154
Loss recognized.......................................	$ 6,096

Patent B carrying amount (12/31/12) $5,154
At December 31, 2012

Patent A	$29,200	($31,600 – [12 X $200])
Patent B	5,154	(Present value of future cash flows)
Patent C	6,000	($9,600 – [12 X $300])
Patent D	27,000	($28,500 – $1,500*)
Total	$67,354

*Patent D amortization
	Life in years	9 1/2
	Life in months	114
	Amortization per month ($28,500 ÷ 114)	$250
	$250 X 6 = $1,500

EXERCISE XXXXXXXXXX–25 minutes)

Net assets of Terrell as reported ($575,000 – $350,000)........................................	$225,000
Adjustments to fair value
Increase in land value.................................	50,000
Decrease in equipment value.....................	(5,000)	45,000
Net assets of Terrell at fair value..........................	270,000
Selling price...........................................................	380,000
Amount of goodwill to be recorded.....................	$110,000

EXERCISE XXXXXXXXXXContinued)
The journal entry to record this transaction is as follows:

Cash....................................................................................	100,000
Land...................................................................................	120,000
Buildings............................................................................	200,000
Equipment.........................................................................	170,000
Copyrights..........................................................................	30,000
Goodwill............................................................................	110,000
Accounts Payable....................................................	50,000
Notes Payable.........................................................	300,000
Cash.........................................................................	380,000

EXERCISE XXXXXXXXXX–15 minutes)

(a)	Cash...................................................................................... ..............................................................................................	50,000
Accounts Receivable............................................................	90,000
Inventory..............................................................................	125,000
Land ....................................................................................	80,000
Buildings...............................................................................	75,000
Equipment............................................................................	70,000
Copyrights............................................................................	15,000
Goodwill...............................................................................	95,000*
Accounts Payable......................................................	200,000
Notes Payable............................................................	150,000
Cash............................................................................	250,000

*$400,000 – [$235,000 + $40,000 + $25,000 + $5,000]
Note that the building and equipment would be recorded at the 7/1/12 cost to Gissel; accumulated depreciation accounts would not be recorded.

(b)	Amortization Expense................................	1,500
Copyrights ([$15,000 – $3,000] X 1/4 X 6/12)........	1,500

EXERCISE XXXXXXXXXX–20 minutes)

(a)	December 31, 2012
Loss on Impairment....................	900,000*
Copyrights.................................	900,000

*Carrying amount.....................	$4,300,000
Fair value........................................	3,400,000
Loss on impairment.......................	$ 900,000

Note: Asset fails recoverability test, future cash flows ($4,000,000)

(b)	Amortization Expense.................	340,000*
Copyrights.................................	340,000

*New carrying amount.............	$3,400,000
Useful life........................................	÷ 10 years
Amortization per year....................	$ 340,000

(c) No entry is necessary. Restoration of any impairment loss is not permitted for assets held for use.
EXERCISE XXXXXXXXXX–20 minutes)

(a)	December 31, 2012
Loss on Impairment....................	25,000,000
Goodwill....................................	25,000,000

The fair value of the reporting unit ($335 million) is below its carrying value ($360 million). Therefore, an impairment has occurred. To determine the impairment amount, we first find the implied goodwill. We then compare this implied fair value to the carrying value of the goodwill to determine the amount of the impairment to record.

Fair value of division........................................	$335,000,000
Carrying amount of division, net of goodwill..............................................	(160,000,000)
Implied value of goodwill................................	175,000,000
Carrying value of goodwill...............................	(200,000,000)
Loss on impairment.........................................	$ 25,000,000

EXERCISE XXXXXXXXXXContinued)
(b) No entry necessary. After a goodwill impairment loss is recognized, the adjusted carrying amount of the goodwill is its new accounting basis. Subsequent reversal of previously recognized impairment losses is not permitted under SFAS No. 142.
Problems that we worked in class
Remember that the process for impair property, plant and equipment is the same as for impairing intangible assets other than goodwill.
4. Chapter 17.

• Investments in equity (stock)
• Investments in debt (bonds)

Practice Problems:
Brief Exercises: 17-1 through 17-6 and 17-8
BRIEF EXERCISE 17-1
(a) Debt Investments (Held-to-Maturity)...... XXXXXXXXXX74,086
Cash.................................................. XXXXXXXXXX74,086
(b) Cash ($80,000 X .09)................................ XXXXXXXXXX7,200
Debt Investments (Held-to-Maturity)....... XXXXXXXXXX949
Interest Revenue ($74,086 X .11)...... XXXXXXXXXX8,149
BRIEF EXERCISE 17-6
(a) Equity Investments (Trading).............. XXXXXXXXXX13,200
Cash............................................... XXXXXXXXXX13,200
(b) Cash...................................................... XXXXXXXXXX1,300
Dividend Revenue (400 X $3.25)... XXXXXXXXXX1,300
(c) Fair Value Adjustment (Trading)......... XXXXXXXXXX600
Unrealized Holding Gain or Loss—
Income [(400 X $34.50) – $13,200] XXXXXXXXXX
BRIEF EXERCISE 17-8

Fair Value Adjustment (Available-for-Sale)

Bal. 200

500

Bal. 700

Fair Value Adjustment (Available-for-Sale XXXXXXXXXX
Unrealized Holding Gain or Loss—Equity XXXXXXXXXX
Exercises: 17-2 through 17-9
EXERCISE XXXXXXXXXX–15 minutes)
(a) January 1, 2012
Debt Investments (Held-to-Maturity XXXXXXXXXX300,000
Cash.......................................... XXXXXXXXXX300,000
(b) December 31, 2012
Cash................................................ XXXXXXXXXX30,000
Interest Revenue....................... XXXXXXXXXX30,000
(c) December 31, 2013
Cash................................................ XXXXXXXXXX30,000
Interest Revenue....................... XXXXXXXXXX30,000
EXERCISE XXXXXXXXXX–20 minutes)
(a) January 1, 2011
Debt Investments (Held-to-Maturity XXXXXXXXXX537,907.40
Cash.......................................... XXXXXXXXXX537,907.40
EXERCISE 17-3 (Continued)
(b) Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%

Date	Cash Received	Interest Revenue	Premium Amortized	Carrying Amount of Bonds
1/1/11	—	—	—	$537,907.40
12/31/11	$60,000	$53,790.74	$6,209.26	531,698.14
12/31/12	60,000	53,169.81	6,830.19	524,867.95
12/31/13	60,000	52,486.80	7,513.20	517,354.75
12/31/14	60,000	51,735.48	8,264.52	509,090.23
12/31/15	60,000	50,909.77*	*9,090.23	500,000.00

*Rounded by 75¢.
(c) December 31, 2011
Cash................................................... XXXXXXXXXX60,000
Debt Investments (Held-to-Maturity XXXXXXXXXX,209.26
Interest Revenue......................... XXXXXXXXXX53,790.74
(d) December 31, 2012
Cash................................................... XXXXXXXXXX60,000
Debt Investments (Held-to-Maturity XXXXXXXXXX,830.19
Interest Revenue........................ XXXXXXXXXX53,169.81
EXERCISE XXXXXXXXXX–15 minutes)
(a) January 1, 2011
Debt Investments (Available-for-Sale XXXXXXXXXX537,907.40
Cash............................................ XXXXXXXXXX537,907.40
(b) December 31, 2011
Cash................................................... XXXXXXXXXX60,000
Debt Investments (Available-for-Sale XXXXXXXXXX,209.26
Interest Revenue ($537,907.40 X XXXXXXXXXX,790.74
Fair Value Adjustment (Available-for-Sale XXXXXXXXXX,501.86
Unrealized Holding Gain or Loss—
Equity ($534,200.00 – $531, XXXXXXXXXX,501.86
EXERCISE 17-4 (Continued)
(c) December 31, 2012
Unrealized Holding Gain or Loss—Equity XXXXXXXXXX,369.81
Fair Value Adjustment
(Available-for-Sale) ................ XXXXXXXXXX12,369.81

Amortized Cost	Fair Value	Unrealized Holding Gain (Loss)
Available-for-sale bonds	$524,867.95	$515,000.00	$ (9,867.95)
Previous fair value adjustment—Dr.	2,501.86
Fair value adjustment—Cr.	$(12,369.81)

EXERCISE XXXXXXXXXX–30 minutes)
(a) Schedule of Interest Revenue and Bond Discount Amortization
Straight-line Method
9% Bond Purchased to Yield 12%

Date	Cash Received	Interest Revenue	Bond Discount Amortization	Carrying Amount of Bonds
1/1/12	—	—	—	$278,384
12/31/12	$27,000	$34,205	*$7,205*	285,589
12/31/13	27,000	34,205	7,205	292,794
12/31/14	27,000	34,206**	7,206	300,000

**($300,000 – $278,384) ÷ 3 = $7,205
**Rounded by $1.
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective-Interest Method
9% Bond Purchased to Yield 12%

Date	Cash Received	Interest Revenue	Bond Discount Amortization	Carrying Amount of Bonds
1/1/12	—	—	—	$278,384.00
12/31/12	$27,000	$33,406.08*	$6,406.08	284,790.08
12/31/13	27,000	34,174.81	7,174.81	291,964.89
12/31/14	27,000	35,035.11**	8,035.11	300,000.00

**$278,384 X .12 = $33,406.08
**Rounded by $.68.
EXERCISE 17-5 (Continued)
(c) December 31, 2013
Cash....................................................... XXXXXXXXXX27,000.00
Debt Investments (Held-to-Maturity)..... XXXXXXXXXX7,205.00
Interest Revenue............................. XXXXXXXXXX34,205.00
(d) December 31, 2013
Cash....................................................... XXXXXXXXXX27,000.00
Debt Investments (Held-to-Maturity)..... XXXXXXXXXX7,174.81
Interest Revenue............................. XXXXXXXXXX34,174.81
EXERCISE XXXXXXXXXX–15 minutes)
(a) Fair Value Adjustment (Trading).......... XXXXXXXXXX3,000
Unrealized Holding Gain or Loss—Income XXXXXXXXXX,000
(b) Fair Value Adjustment (Available-for-Sale XXXXXXXXXX,000
Unrealized Holding Gain or Loss—Equity XXXXXXXXXX,000
(c) The Unrealized Holding Gain or Loss—Income account is reported in the income statement under Other Revenues and Gains. The Unrealized Holding Gain or Loss—Equity account is reported as a part of other comprehensive income and as a component of stockholders’ equity until realized. The Fair Value Adjustment account is added to the cost of the Equity Investments classified as Available-for-Sale or Trading Securities account to arrive at fair value.
EXERCISE XXXXXXXXXX–15 minutes)
(a) December 31, 2012
Unrealized Holding Gain or Loss—Income XXXXXXXXXX,400
Fair Value Adjustment (Trading)..... XXXXXXXXXX1,400
(b) During 2013
Cash....................................................... XXXXXXXXXX9,500
Loss on Sale of Investments................. XXXXXXXXXX500
Equity Investments (Trading)......... XXXXXXXXXX10,000
EXERCISE 17-7 (Continued)
(c) December 31, 2013

Securities	Cost	Fair Value	Unrealized Gain (Loss)
Stargate Corp. stock	$20,000	$19,300	($ (700)
Vectorman Co. stock	20,000	20,500	( 500)
Total of portfolio	$40,000	$39,800	( (200)
Previous fair value adjustment balance—Cr.	( (1,400)
Fair value adjustment—Dr.	($1,200)

Fair Value Adjustment (Trading).......... XXXXXXXXXX1,200
Unrealized Holding Gain or Loss—Income XXXXXXXXXX,200
EXERCISE XXXXXXXXXX–10 minutes)
The unrealized gains and losses resulting from changes in the fair value of available-for-sale securities are recorded in an unrealized holding gain or loss account that is reported as other comprehensive income and as a separate component of stockholders’ equity until realized. Therefore, the following adjusting entry should be made at the year-end:
Unrealized Holding Gain or Loss—Equity... XXXXXXXXXX6,000
Fair Value Adjustment (Available-for-Sale XXXXXXXXXX,000
Unrealized Holding Gain or Loss—Equity is reported as other comprehensive income and as a separate component in stockholders’ equity and not included in net income. The Fair Value Adjustment (Available-for-Sale) account is a valuation account to the related investment account.
EXERCISE XXXXXXXXXX–15 minutes)
(a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio is $53,000, the unrealized holding gain is $1,500, of which $200 is already recognized. Therefore, the December 31, 2012 adjusting entry should be:
Fair Value Adjustment (Available-for-Sale XXXXXXXXXX,300
Unrealized Holding Gain or Loss—Equity XXXXXXXXXX,300
EXERCISE 17-9 (Continued)
(b) The unrealized holding gain of $1,500 (including the previous balance of $200) should be reported as an addition to stockholders’ equity and the Fair Value Adjustment (Available-for-Sale) account balance of $1,500 should be added to the cost of the securities account.
WENGER, INC.
Balance Sheet
As of December 31, 2012
___________________________________________
Current assets:
Equity investments........................................... $54,500
Stockholders’ equity:
Common stock.................................. XXXXXXXXXXxxx,xxx
Paid-in capital in excess of par—
Common stock.............................. XXXXXXXXXXxxx,xxx
Retained earnings............................. XXXXXXXXXXxxx,xxx
Accumulated other comprehensive income XXXXXXXXXX,500*
Total stockholders’ equity............................ $xxx,xxx
*Note: The unrealized holding gain could also be disclosed.
(c) Computation of realized gain or loss on sale of stock:
Net proceeds from sale of security A.............. $15,300
Cost of security A............................. XXXXXXXXXX17,500
Loss on investments......................................... ($ 2,200)
January 20, 2013
Cash......................................................... XXXXXXXXXX15,300
Loss on Sale of Investments................... XXXXXXXXXX2,200
Equity Investments (Available-for-Sale XXXXXXXXXX,500
Problems we worked in class
No equity method
5. Chapter 18.

• Percentage-of-completion for revenue recognition
• Installment method for revenue recognition

Practice Problems:
Brief Exercises: 18-7 though 18-14
BRIEF EXERCISE 18-7
Construction in Process....................... XXXXXXXXXX1,700,000
Materials, Cash, Payables.............. XXXXXXXXXX1,700,000
Accounts Receivable............................ XXXXXXXXXX1,200,000
Billings on Construction in Process XXXXXXXXXX,200,000
Cash....................................................... XXXXXXXXXX960,000
Accounts Receivable...................... XXXXXXXXXX960,000
Construction in Process
[($1,700,000 ÷ 5,000,000) X $2,000,000] XXXXXXXXXX,000
Construction Expenses......................... XXXXXXXXXX1,700,000
Revenue from Long-Term Contracts
($7,000,000,000 X 34%)............... XXXXXXXXXX2,380,000
BRIEF EXERCISE 18-8
Current Assets
Accounts Receivable....................................... $ 240,000
Inventories
Construction in process.......................... $2,450,000
Less: Billings.......................... XXXXXXXXXX1,400,000
Costs and recognized profit in
excess of billings........... XXXXXXXXXX1,050,000
BRIEF EXERCISE 18-9
Construction in Process....................... XXXXXXXXXX1,700,000
Materials, Cash, Payables.............. XXXXXXXXXX1,700,000
Accounts Receivable............................ XXXXXXXXXX1,200,000
Billings on Construction in Process XXXXXXXXXX,200,000
Cash......................................................................... .................................................. XXXXXXXXXX960,000
Accounts Receivable...................... XXXXXXXXXX960,000
BRIEF EXERCISE 18-10
Current Assets
Accounts Receivable....................................... $240,000
Inventories
Construction in process.......................... $1,715,000
Less: Billings.......................... XXXXXXXXXX1,000,000
Costs in excess of billings......... XXXXXXXXXX715,000
BRIEF EXERCISE 18-11
(a) Construction Expenses................. XXXXXXXXXX278,000
Construction in Process......... XXXXXXXXXX20,000*
Revenue from Long-Term Contracts XXXXXXXXXX,000
(b) Loss from Long-Term Contracts.. XXXXXXXXXX20,000*
Construction in Process......... XXXXXXXXXX20,000
*[$420,000 – ($278,000 + $162,000)]
BRIEF EXERCISE 18-12
Installment Accounts Receivable, 2012.. XXXXXXXXXX150,000
Installment Sales Revenue................ XXXXXXXXXX150,000
Cash........................................................... XXXXXXXXXX54,000
Installment Accounts Receivable, XXXXXXXXXX54,000
Cost of Installment Sales......................... XXXXXXXXXX102,000
Inventory............................................. XXXXXXXXXX102,000
Installment Sales Revenue....................... XXXXXXXXXX150,000
Cost of Installment Sales................... XXXXXXXXXX102,000
Deferred Gross Profit, 2012............... XXXXXXXXXX48,000
Deferred Gross Profit, 2012...................... XXXXXXXXXX17,280
Realized Gross Profit (32% X $54,0 XXXXXXXXXX17,280
BRIEF EXERCISE 18-13
Repossessed Merchandise..................... XXXXXXXXXX275
Loss on Repossession............................. XXXXXXXXXX37*
Deferred Gross Profit ($520 X 40%)........ XXXXXXXXXX208
Installment Accounts Receivable...... XXXXXXXXXX520
*[$275 – ($520 – $208)]
BRIEF EXERCISE 18-14
Current Assets
Installment accounts receivable due in 2013.... $ 65,000
Installment accounts receivable due in XXXXXXXXXX,000
$175,000
Current Liabilities
Deferred gross profit ($23,400 + $41,800).......... $ 65,200
Exercises: 18-12 through 18-26
EXERCISE XXXXXXXXXX–25 minutes)
(a) Gross profit recognized in:

2012	2013	2014
Contract price	$1,600,000	$1,600,000	$1,600,000
Costs:
Costs to date	$400,000	$825,000	$1,070,000
Estimated costs to complete	600,000	1,000,000	275,000	1,100,000	0	1,070,000
Total estimated profit	600,000	500,000	530,000
Percentage completed to date	X 40%*	X 75%**	X 100%
Total gross profit recognized	240,000	375,000	530,000
Less: Gross profit recognized in previous years	0	240,000	375,000
Gross profit recognized in current year	$ 240,000	$ 135,000	$ 155,000

* *$400,000 ÷ $1,000,000**$825,000 ÷ $1,100,000
EXERCISE XXXXXXXXXXContinued)
(b) Construction in Process ($825,000 – $400, XXXXXXXXXX,000
Materials, Cash, Payables............. XXXXXXXXXX425,000
Accounts Receivable ($900,000 – $300, XXXXXXXXXX,000
Billings on Construction in Process XXXXXXXXXX,000
Cash ($810,000 – $270,000)................. XXXXXXXXXX540,000
Accounts Receivable..................... XXXXXXXXXX540,000
Construction Expenses....................... XXXXXXXXXX425,000
Construction in Process...................... XXXXXXXXXX135,000
Revenue from Long-Term Contracts XXXXXXXXXX,000*
*$1,600,000 X (75% – 40%)
(c) Gross profit recognized in:

Gross profit	2012	2013	2014
$–0–	$–0–	$530,000*

*$1,600,000 – $1,070,000
EXERCISE XXXXXXXXXX–15 minutes)
(a) Contract billings to date........................................ $61,500
Less: Accounts receivable 12/31/12....... XXXXXXXXXX18,000
Portion of contract billings collected................... $43,500

(b)	$19,500	= 30%
$65,000

(The ratio of gross profit to revenue recognized in 2012.)
$1,000,000 X .30 = $300,000
(The initial estimated total gross profit before tax on the contract.)
EXERCISE XXXXXXXXXX–12 minutes)
DOUGHERTY INC.
Computation of Gross Profit to be
Recognized on Uncompleted Contract
Year Ended December 31, 2012
Total contract price
Estimated contract cost at completion
($800,000 + $1,200,000)......................................... $2,000,000
Fixed fee..................................................... XXXXXXXXXX450,000
Total................................................... XXXXXXXXXX2,450,000
Total estimated cost................................... XXXXXXXXXX2,000,000)
Gross profit............................................... XXXXXXXXXX450,000
Percentage of completion ($800,000 ÷ $2,000, XXXXXXXXXX%
Gross profit to be recognized ($450,000 X 40%)...... $ 180,000
EXERCISE XXXXXXXXXX–30 minutes)
(a) 1. Gross profit recognized in 2012:
Contract price...................................................... $1,200,000
Costs:
Costs to date......................................... $280,000
Estimated additional costs....... XXXXXXXXXX520, XXXXXXXXXX,000
Total estimated profit........................ XXXXXXXXXX400,000
Percentage completion to date
($280,000/$800,000)...................... XXXXXXXXXXX 35%
Gross profit recognized in 2012......................... $ 140,000
Gross profit recognized in 2013:
Contract price...................................................... $1,200,000
Costs:
Costs to date......................................... $600,000
Estimated additional costs....... XXXXXXXXXX200, XXXXXXXXXX,000
Total estimated profit........................ XXXXXXXXXX400,000
Percentage completion to date
($600,000/$800,000)...................... XXXXXXXXXXX 75%
Total gross profit recognized........... XXXXXXXXXX300,000
Less: Gross profit recognized in 2 XXXXXXXXXX140,000
Gross profit recognized in 2013......................... $ 160,000
EXERCISE XXXXXXXXXXContinued)
2. Construction in Process ($600,000 – $280, XXXXXXXXXX,000
Materials, Cash, Payables......... XXXXXXXXXX320,000
Accounts Receivable ($500,000 – $150, XXXXXXXXXX,000
Billings on Construction in Process XXXXXXXXXX,000
Cash ($320,000 – $120,000).............. XXXXXXXXXX200,000
Accounts Receivable................. XXXXXXXXXX200,000
Construction in Process................... XXXXXXXXXX160,000
Construction Expenses.................... XXXXXXXXXX320,000
Revenue from Long-Term Contracts XXXXXXXXXX,000*
*$1,200,000 X [($600,000 – $280,000) ÷ $800,000]
(b) Income Statement (2013)—
Gross profit on long-term construction contract $160,000
Balance Sheet (12/31/13)—
Current assets:
Receivables—construction in process...... $180,000*
Inventories—construction in process totaling
$900,000** less billings of $500,000....... $400,000
**$180,000 = $500,000 – $320,000
**Total cost to date $600,000
2012 Gross profit 140,000
2013 Gross profit 160,000
$900,000
EXERCISE XXXXXXXXXX–20 minutes)

(a)	2012—	$640,000	X $2,200,000 = $880,000
$1,600,000

2013—$2,200,000 (contract price) minus $880,000 (revenue recognized in 2012) = $1,320,000 (revenue recognized in 2013).
EXERCISE XXXXXXXXXXContinued)
(b) All $2,200,000 of the contract price is recognized as revenue in 2013.
(c) Using the percentage-of-completion method, the following entries would be made:
Construction in Process...................... XXXXXXXXXX640,000
Materials, Cash, Payables............ XXXXXXXXXX640,000
Accounts Receivable........................... XXXXXXXXXX420,000
Billings on Construction in Process XXXXXXXXXX,000
Cash...................................................... XXXXXXXXXX350,000
Accounts Receivable................... XXXXXXXXXX350,000
Construction in Process...................... XXXXXXXXXX240,000*
Construction Expenses....................... XXXXXXXXXX640,000
Revenue from Long-Term Contracts
[from (a)].................................... XXXXXXXXXX880,000
*[$2,200,000 – ($640,000 + $960,000)] X ($640,000 ÷ $1,600,000)
(Using the completed-contract method, all the same entries are made except for the last entry. No income is recognized until the contract is completed.)
EXERCISE XXXXXXXXXX–25 minutes)
(a) Computation of Gross Profit to Be Recognized under Completed-
Contract Method.
No computation necessary. No gross profit to be recognized prior to completion of contract.
Computation of Billings on Uncompleted Contract in Excess of Related Costs under Completed-Contract Method.
Construction costs incurred during the year............ $ 1,185,800
Partial billings on contract (25% X $6,000, XXXXXXXXXX,500,000)
$ (314,200)
EXERCISE XXXXXXXXXXContinued)
(b) Computation of Gross Profit to Be Recognized under Percentage-of-Completion Method.
Total contract price.................................................... $6,000,000
Total estimated cost ($1,185,800 + $4,204, XXXXXXXXXX,390,000)
Estimated total gross profit from contract XXXXXXXXXX610,000
Percentage-of-completion ($1,185,800/$5,390,000). X 22%
Gross profit to be recognized during the year
($610,000 X 22%)..................................................... $ 134,200
Computation of Billings on Uncompleted Contract in Excess of Related Costs and Recognized Profit under Percentage-of-Completion Method.
Construction costs incurred during the year............ $ 1,185,800
Gross profit to be recognized during the year (above) ........................................ XXXXXXXXXX134,200
Total charged to construction-in-process XXXXXXXXXX,320,000
Partial billings on contract (25% X $6,000, XXXXXXXXXX,500,000)
$ (180,000)
EXERCISE XXXXXXXXXX–25 minutes)
BERSTLER CONSTRUCTION COMPANY
Partial Income Statement
Year Ended December 31, 2012
Revenue from long-term contracts (Project 3)................. ............................................................................................ ............................................................................. $520,000
Costs of construction (Project 3)...................................... ............................................................................................ ........................................................... XXXXXXXXXX330,000
Gross profit......................................................................... ............................................................................................ ............................................................ XXXXXXXXXX190,000
Loss on long-term contract (Project 1)*............................ ............................................................................................ ............................................................. XXXXXXXXXX20,000)
*Computation of loss (Project 1)
Contract costs through 12/31/12.................. $450,000
Estimated costs to complete...... XXXXXXXXXX130,000
Total estimated costs................... XXXXXXXXXX580,000
Total contract price..................... XXXXXXXXXX560,000
Loss recognized in 2012............................... $ (20,000 )
EXERCISE XXXXXXXXXXContinued)
BERSTLER CONSTRUCTION COMPANY
Partial Balance Sheet
December 31, 2012
Current assets:
Accounts receivable ($1,080,000 – $990,000)... $90,000
Inventories
Construction in process
($450,000 – $20,000)................................ $430,000............................................................. *
Less: Billings............................. XXXXXXXXXX360,000
Unbilled contract costs (Project XXXXXXXXXX70,000
Current liabilities:
Billings ($220,000) in excess of contract
costs ($126,000) (Project 2)........... XXXXXXXXXX94,000
*The loss of $20,000 was subtracted from the construction in process account.
EXERCISE XXXXXXXXXX–20 minutes)
(a) Computation of gross profit recognized:

2012	2013
$370,000 X 34%*	$125,800
$350,000 X 34%*	$119,000
$450,000 X 32%**		144,000
$125,800	$263,000

*($ 900,000 – $594,000) ÷ $ 900,000
**($1,000,000 – $680,000) ÷ $1,000,000
(b) Installment Accounts Receivable XXXXXXXXXX1,000,000
Installment Sales Revenue........ XXXXXXXXXX1,000,000
Cost of Installment Sales................. XXXXXXXXXX680,000
Inventory..................................... XXXXXXXXXX680,000
EXERCISE XXXXXXXXXXContinued)
Cash...................................................... XXXXXXXXXX800,000
Installment Accounts Receivable ( XXXXXXXXXX350,000
Installment Accounts Receivable ( XXXXXXXXXX450,000
Installment Sales Revenue.................. XXXXXXXXXX1,000,000
Cost of Installment Sales............... XXXXXXXXXX680,000
Deferred Gross Profit (2013).......... XXXXXXXXXX320,000
Deferred Gross Profit (2012).................... XXXXXXXXXX119,000
Deferred Gross Profit (2013).................... XXXXXXXXXX144,000
Realized Gross Profit..................... XXXXXXXXXX263,000
Realized Gross Profit........................... XXXXXXXXXX263,000
Income Summary.......................... XXXXXXXXXX263,000
EXERCISE XXXXXXXXXX–20 minutes)
(a) Deferred Gross Profit (2012)................ XXXXXXXXXX2,800*
Deferred Gross Profit (2013)................ XXXXXXXXXX12,800**
Deferred Gross Profit (2014)................ XXXXXXXXXX69,400***
Realized Gross Profit..................... XXXXXXXXXX85,000
(To recognize gross profit on installment sales)
*Adjustment for deferred gross profit—2012:
Balance in deferred gross profit account
prior to adjustment................................................. $ 7,000
Balance after adjustment ($12,000 X 35% XXXXXXXXXX4,200)
Adjustment.......................................................... $ 2,800
**Adjustment for deferred gross profit—2013:
Balance in deferred gross profit account
prior to adjustment................................................. $26,000
Balance after adjustment ($40,000 X 33% XXXXXXXXXX13,200)
Adjustment.......................................................... $12,800
***Adjustment for deferred gross profit—2014:
Balance in deferred gross profit account
prior to adjustment................................................. $95,000
Balance after adjustment ($80,000 X 32% XXXXXXXXXX25,600)
Adjustment.......................................................... $69,400
EXERCISE XXXXXXXXXXContinued)
(b) Cash collected in 2014 on accounts receivable of 2012:
$2,800/35% = $8,000.
Cash collected in 2014 on accounts receivable of 2013:
$12,800/33% = $38,788.
Cash collected in 2014 on accounts receivable of 2014:
$69,400/32% = $216,875.
EXERCISE XXXXXXXXXX–20 minutes)
Gross Profit Rate—2012: ($750,000 – $510,000) ÷ $750,000 = 32%
Gross Profit Rate—2013: ($840,000 – $588,000) ÷ $840,000 = 30%
(a) Balance, December 31, 2012:
Deferred Gross Profit Account—2012 Installment Sales
Gross profit on installment sales—2012
($750,000 – $510,000)............................................. $240,000
Less: Gross profit realized in 2012 ($310,000 X 32%) ............................................. XXXXXXXXXX99,200
Balance at 12/31/12......................................... $140,800
Balance, December 31, 2013:
Deferred Gross Profit Account—2012 Installment Sales
Balance at 12/31/12.................................................... $140,800
Less: Gross profit realized in 2013 on 2012 sales
($300,000 X 32%)................................ XXXXXXXXXX96,000
Balance at 12/31/13......................................... $ 44,800
Deferred Gross Profit Account—2013 Installment Sales
Gross profit on installment sales—2013
($840,000 – $588,000)............................................. $252,000
Less: Gross profit realized in 2013 on 2013 sales
($400,000 X 30%)................................ XXXXXXXXXX120,000
Balance at 12/31/13......................................... $132,000
EXERCISE XXXXXXXXXXContinued)
(b) Repossessed Merchandise.................... XXXXXXXXXX8,000
Deferred Gross Profit ($12,000 X 32%).. XXXXXXXXXX3,840
Loss on Repossession........................... XXXXXXXXXX160*
Installment Accounts Receivable.... XXXXXXXXXX12,000
(To record the default and the
repossession of the merchandise)
*[$8,000 – ($12,000 – $3,840)]
EXERCISE XXXXXXXXXX–15 minutes)
BECKER CORPORATION
Income before Income Taxes on Installment-Sale Contract
For the Year Ended December 31, 2012
Sales................................................................................... ............................................................................. $586,842
Cost of sales....................................................................... ........................................................... XXXXXXXXXX425,000
Gross profit......................................................................... ............................................................ XXXXXXXXXX161,842
Interest revenue (Schedule 1)........................................... ........................................................... XXXXXXXXXX24,342
Income before income taxes............................................. ............................................................................. $186,184
Schedule 1
Computation of Interest Revenue on Installment-Sale Contract
Cash selling price.............................................................. ............................................................................. $586,842
Deduct payment made July 1, 2012.................................. ........................................................... XXXXXXXXXX100,000
486,842
Interest rate........................................................................ ....................................................................... XXXXXXXXXXX.................................................................. XXXXXXXXXX10%
Annual interest................................................................... ............................................................................. $ 48,684
Interest July 1, 2012 to December 31, 2012 ($48,684 X 1/2)...................................................................................... ............................................................................. $ 24,342
EXERCISE XXXXXXXXXX–15 minutes)
(a) Realized gross profit recognized in 2013 under the installment-sales method of accounting is $83,000. When gross profit is expressed as a percentage of cost, it must be converted to percentage of sales to compute the realized gross profit under the installment-sales method of accounting. Thus, 2012 and 2013 gross profits as a percentage of sales are 20% and 21.875% respectively.
EXERCISE XXXXXXXXXXContinued)

Sale Year	Gross Profit Percentage	2013 Collections	2013 Realized Profit
2012	.25/ XXXXXXXXXX) = 20%	$240,000	$48,000
2013	.28/ XXXXXXXXXX) = 21.875%	160,000	35,000
TOTAL	$83,000

(Note to instructor: The problem provides gross profit as a percent of cost.)
(b) The balance of “Deferred Gross Profit” could be reported on the balance sheet for 2013:
1. As a current liability on the theory that it is related to Installment Accounts Receivables that are normally treated as current assets;
2. As a deferred credit between liabilities and stockholders’ equity. This treatment is criticized because there is no obligation to outsiders; or
3. As an adjustment or offset to the related Installment Accounts Receivable. This is because the deferred gross profit is a part of reve­nue from installment sales not yet realized. The related receivable will be overstated unless the deferred gross profit is deducted.
On the other hand, the amount of deferred gross profit has no direct relationship with the estimated collectibility of the accounts receivable.
It is not a settled matter as to the proper classification of “deferred gross profit” on the balance sheet when the installment-sales method of accounting is used to measure income. As indicated in the text, the FASB in Statement of Financial Accounting Concepts No. 6 indicates that it conceptually is an asset valuation. We support the FASB position.
(c) Gross profit as a percent of sales in 2012 is 20% (as computed in (a) above); gross profit therefore is $96,000 ($480,000 X .20) and the cost of 2012 sales is $384,000 ($480,000 – $96,000). Because the amounts collected in 2012 ($130,000) and 2013 ($240,000) do not exceed the total cost of $384,000, no profit is recognized in 2012 or 2013 on 2012 sales. Also, no profit is recognized on 2013 sales since the collections of $160,000 do not exceed the total cost of $484,375 [$620,000 X (1 – .21875)].
EXERCISE XXXXXXXXXX–20 minutes)
(a) Computation of gross profit realized—cost-recovery method:

Year	Cash Received	Original Cost Recovered	Balance of Unrecovered Cost	Gross Profit Realized
Beginning balance	—	—	$150,000	—
2012	$120,000	$120,000	30,000	$0
2013	90,000	30,000	0	60,000
2014	40,000	0	0	40,000

(b) Computation of gross profit realized—installment-sales method:
Gross profit rate: ($250,000 – $150,000) ÷ $250,000 = 40%
2012 Gross profit realized: $120,000 X 40% = $48,000
2013 Gross profit realized: $ 90,000 X 40% = $36,000
2014 Gross profit realized: $ 40,000 X 40% = $16,000
EXERCISE XXXXXXXXXX–15 minutes)
1. Repossessed Merchandise...................... XXXXXXXXXX800
Deferred Gross Profit (30% X $1,080*).... XXXXXXXXXX324
Installment Accounts Receivable..... XXXXXXXXXX1,080*
Gain on Repossession [$800 – ($1,080 – $324)] XXXXXXXXXX
*Computation of installment accounts receivable balance.
Selling price.................................................. $1,800
Down payment (20% X $1,800).... XXXXXXXXXX360 )
1,440
Installment payments (4/16 X $1, XXXXXXXXXX )
Installment accounts receivable balance.... $1,080
2. Repossessed Merchandise...................... XXXXXXXXXX750
Deferred Gross Profit (20% X $780*)....... XXXXXXXXXX156
Installment Accounts Receivable..... XXXXXXXXXX780*
Gain on Repossession [$750 – ($780 – $156)] XXXXXXXXXX
*Computation of installment accounts receivable balance.
Selling price.................................................... $1,500
Down payment.............................. XXXXXXXXXX240 )
1,260
Monthly payments ($80 X 6)......... XXXXXXXXXX480 )
Installment accounts receivable balance..... $ 780
EXERCISE XXXXXXXXXX–20 minutes)
Cash................................................................. XXXXXXXXXX500
Installment Accounts Receivable........... XXXXXXXXXX500
Deferred Gross Profit (30% X $500)............... XXXXXXXXXX150
Realized Gross Profit............................... XXXXXXXXXX150
Repossessed Merchandise............................ XXXXXXXXXX590
Deferred Gross Profit (30% X $1,300)............ XXXXXXXXXX390
Loss on Repossession.................................... XXXXXXXXXX320*
Installment Accounts Receivable ($1,800 – $ XXXXXXXXXX,300
Repossessed Merchandise............................ XXXXXXXXXX60
Cash.......................................................... XXXXXXXXXX60
*[$590 – ($1,300 – $390)]
Problems we worked in class
No completed-contract or cost recovery method