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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions

Among the principal topics related to the accounting for property, plant, and equipment of a company are acquisition and retirement.Required1. Explain the expenditures that a company capitalizes when it acquires equipment for cash.2. Assume that a company cannot determine the market value of
George Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. Furthermore, a substantial amount of rock blasting and removal had to be done to the site before
Deskin Company purchased a new machine to be used in its operations. The new machine was delivered by the supplier, installed by Deskin, and placed into operation. It was purchased under a long-term payment plan for which the interest charges approximated the prevailing market rates. The estimated
A company may acquire plant assets (among other ways) for cash, on a deferred-payment plan, by exchanging other assets, or by a combination of these ways. Required1. Identify six costs that a company should capitalize as the cost of land. For your answer, assume that a company acquires land with an
Bristol Company purchased land as a site for construction of a factory. Outside contractors were engaged to:1. Construct the factory2. Grade and pave a parking lot adjacent to the factory for the exclusive use of the factory workers. Operations at the new location began during the year and normal
In 1975 a trial was held to settle a tax dispute between the owners of the Atlanta Falcons, a National Football League franchise, and the Internal Revenue Service. In 1966, the owners had paid $8.5 million to purchase the franchise. They considered $50,000 to be the cost of the franchise (which is
The Gold Creek Company has borrowed large amounts of money to purchase 5,000 acres of land, which it will develop as a new ski area over the next 10 years. Development is currently under way on the first 2,000 acres, with trails being cut and ski lifts being built. When the company completes this
The Morgan Company was planning to expand its production facilities. Therefore it acquired one-year options to purchase two alternative sites. Each option cost $5,000 and could not be applied against the contract. One of the sites was bought for $100,000. The company was unsure whether to
The Birkby Company acquires a building as a donation from the City of Avalon. The controller argues that since there was no payment by the company, it is not necessary to record the asset and therefore no depreciation should be recorded. The company has to spend $15,000 altering the building to
You have been engaged to examine the financial statements of Brahe Corporation for the year ending December 31, 2007. Brahe Corporation was organized in January 2007 by Messrs. Moses and Price, original owners of options to acquire oil leases on 5,000 acres of land for $350,000. They expected that
You are the accountant for a division of a company that is constructing a building for its own use. It is January 2008, and you are working on closing the books for 2007. The CEO of the division stops by your office and says, “I have some questions about our building. Although we started
Situation The Tenth National Bank had taken possession of a shopping mall in foreclosure of a mortgage. When the mall was inspected prior to being sold by the bank to a real estate company, it was discovered that it had extensive asbestos problems. An estimate indicated that it would cost $1
Situation The Perry Park Company (a privately-held company) was searching for a way to expand its operating capacity even though it was short of cash. The president of the company was playing golf and mentioned his concern to his playing partner, who owned some land and a building, and was
Why is revenue sometimes recognized at a time other than the sale?
Distinguish between the terms recognition and realization.
Describe the effects on a company’s financial statements of recognizing revenue at the time of sale, during production, and at the time of cash receipt.
What three factors affect the decision as to when to recognize revenue?
What are the five revenue recognition alternatives?
Under what circumstances does a company recognize revenue prior to the period of sale? What two methods may it use?
What are the differences between the two methods of accounting for long-term construction contracts?
Under what circumstances does a company use the percentage-of-completion method for long-term contracts?
How may the departure from the principle of recognizing revenue only at the time of the sale be justified when a company uses the percentage-of-completion method?
Describe input and output measures used in the percentage-of-completion method. Give an example of each.
How does a company account for losses under the two methods of accounting for long-term construction contracts?
How does a company classify the following accounts in its financial statements: Construction in Progress, Partial Billings, Construction Revenue, and Construction Expense?
How does a company recognize initial direct costs, direct costs, and indirect costs as expenses under the proportional performance method? Explain the reason for each method.
Under what circumstances does a company recognize revenue after the period of the sale? What two methods are used?
Describe the steps involved in the installment method.
Describe the differences between the cost recovery method and the installment method.
Describe the basic characteristics of the deposit method.
Distinguish between the initial franchise fee and continuing franchise fee. When is each recognized as revenue?
How is revenue recognized for real estate sales?
How is revenue recognized for retail land sales?
In a consignment, does the consignee or consignor retain title to the property? When is revenue recognized by the consignor? The consignee?
Multiple Choice1. Real estate sales are recognized by the accrual method if all of the conditions defined by FASB Statement No. 66 are met. Which of the following is not one of the conditions defined by the Statement?a. The seller has transferred to the buyer the usual risks and rewards of
The Smith Construction Company received a contract on September 30, 2007 to build a warehouse over a period of 18 months. The contract price was $600,000 and the estimated cost to build was $400,000. The actual (and estimated) costs incurred and the payments made by the purchaser are as
In 2007 Tarlo Company agrees to construct a highway for Brice County over a three-year period (2007 through 2009). The contract price is $1,200,000 and the construction costs (both actual and estimated) total $705,000 for the three years. The percentage completed at the end of each year is as
The King Construction Company began work on a contract in 2007. The contract price is $4,000,000, and the company uses the percentage-of-completion method. Other information relating to the contract is as follows:2007Costs incurred during the year....... $ 800,000Estimated costs to complete,
The Koolman Construction Company began work on a contract in 2007. The contract price is $3,000,000, and the company uses the percentage-of-completion method. Other information relating to the contract is as follows:Required1. Compute the gross profit or loss recognized in 2007 and 2008.2. Prepare
Newberg Construction Corporation contracted to construct a building for $400,000. Construction began in 2007 and was completed in 2008. Data relating to the contract are as follows:RequiredNewberg uses the percentage-of-completion method as the basis for income recognition. For the years ended
The Osborn Construction Company began operations January 2, 2007. During the year, Osborn entered into a contract with Redbeard Razor Corporation to construct a manufacturing facility. At that time, Osborn estimated that it would take five years to complete the facility at a total cost of
The New Recreational Company sells two-year memberships to its recreational facilities. For $2,200 in advance, each member receives the right to 30 nights at the company’s campgrounds, 20 rounds on its golf courses, and 50 hours on its bowling lanes. In 2007 the company sold 400 memberships.
In 2007 the Sterling Farm Company produced 100,000 bushels of wheat at a cost of $2.00 per bushel. The company has a contract to deliver 80,000 bushels at $2.15 per bushel in 2008. Delivery costs are estimated to be $0.02 per bushel. For guaranteed price contracts, the company recognizes revenue at
Anibonita Company began operations in 2007. It sells goods on installment sales contracts; these transactions are considered to be exceptional, so it uses the installment method to recognize gross profit. The following is a summary of the installment sales, costs of installment sales, operating
The following information is available for the Butler Company in 2007, its first year of operations:Total credit sales (including installment method sales) ..........$205,000Total cost of goods sold (including installment method cost of goods sold) ...130,000Installment method sales
The following information is available for the Butler Company, which began operations in 2007:Required1. Prepare the journal entries for 2007 and 2008.2. Prepare a partial income statement and a partial balance sheet for2007.
The following partial information is available for the Cupp Company:RequiredCompute the unknown amounts. (Note: It is not necessary to compute the amounts in the numericalsequence.)
The Smookler Company uses the installment method for certain sales and experiences a constant gross profit rate of 20%. The following are the account balances at December 31, 2007 and 2008:RequiredPrepare the journal entries for2008.
In 2007 the Huxley Company, a real estate company, purchased some raw land for $60,000 and resold it on credit for $90,000. Because of the speculative nature of the usefulness of the land, the company used the cost recovery method for the sale of the land. The cash collections in 2007, 2008, and
On January 1, 2007, the Fritz Company sold a building in a depressed area for $200,000. The building had originally cost $500,000 and had a book value of $100,000. The sale agreement required the purchaser to pay $5,000 down and sign an 8% note for the balance. Interest on the note is payable at
The Chocomalt Company sells franchises. For each franchise, the company charges an initial franchise fee of $28,000. The franchise agreement requires a down payment of $8,000, with the balance covered by the issuance of a $20,000, 12% note, payable by the franchisee in two equal annual
On April 16, 2007 the Winger Company shipped 10 tractors to the Yuma Farm Supply Company on consignment. Each tractor cost $30,000 and the Winger Company incurred cash shipment costs of $100 per tractor. The consignment agreement required payment to Winger at year-end. On December 31, 2007 the
Refer to the information in E18-17.Required1. Prepare the 2007 journal entries for the Winger Company.2. What amount related to the consignment activities, and in what category, would the company report on its balance sheet on December 31, 2007?
Each of the following independent situations relates to the recognition of revenue:a. Interest on loans made by a bankb. Interest on loans made by a bank when the loans are in defaultc. Collection of fares by an airline when the passengers make the reservationsd. Shipment of freight and mail by an
The Slattery Company was formed on January 1, 2007 to build a single product. The company issued no-par common stock on that date for $300,000 cash. The product costs $20 to make, all of which is paid in cash at the time of production. The company sells each unit of the product for $35 on credit
In 2007 Dreyer Corporation began construction work under a three-year contract. The contract price is $800,000. Dreyer uses the percentage-of-completion method. The financial statement presentations relating to this contract on December 31, 2007 follow:Required1. How much cash did Dreyer collect
The Fender Construction Company receives a contract to build a building over a period of three years for a price of $700,000. Information relating to the performance of the contract is summarized as follows:RequiredPrepare journal entries for all three years under (1) The percentage-of-completion
The Forman Company has contracted to build a dam over a period of four years for $3,000,000. Information relating to the performance of the contract is summarized as follows:Required1. Compute the profit or loss for each year of the contract under (a) the percentage-of-completion method, and (b)
The Rice Company signed a contract to build a dam over a period of three years for a price of $10,000,000. Information relating to the performance of the contract is summarized as follows:RequiredPrepare journal entries for all three years under (1) The percentage-of-completion method, and (2) The
The Hilt Company, a public relations company, signs two-year contracts with its clients. For $80,000 in advance, the company agrees to ensure that the client’s name is mentioned five times on a network national news program, 10 times in a national news magazine, and 15 times on a local news
The following information is available for the Dassler Company, which began its operations in 2007:1. Installment method sales2007 .....$520,0002008 .......600,0002. Gross profit percentage2007 .......20%2008 .......24%3. Cash collections on installment method sales2007 .......25% of 2007 sales2008
The Dyson Company sells computer games to teenagers. Selected accounts included in the trial balance at December 31, 2007 and 2008 are as follows:During 2007 installment method sales and cost of goods sold were $200,000 and $160,000, respectively. In 2007 the company repossessed games that had been
After a two-year search for a buyer, Hobson, Inc. sold its idle plant facility to Jackson Company for $700,000 on January 1, 2005. On this date the plant had a depreciated cost on Hobson's books of $500,000. Under the agreement Jackson paid $100,000 cash on January 1, 2005, and signed a $600,000
The following are the operating activities of three different companies: Company A: Engages in long-term construction contracts. Uses the percentage-of-completion method to recognize gross profits. Started contract X in 2006, contract Y in 2007, and contract Z in 2008. The total gross profit
The following are the operating activities of three different companies. Company X: Engages in long-term service contracts involving a specific number of defined but not similar service acts. Uses proportional performance method to recognize revenues. Sells two-year service contracts for $600 in
Year-Round Golf sells franchises for indoor golf driving ranges and putting greens. For each franchise, the company charges a nonrefundable initial franchise fee of $45,000. The franchise agreement requires a down payment of $10,000, with the balance covered by the issuance of a $35,000, 10% note,
On January 1, 2007 the Hogback Company sold the Red Rocks Ranch, which constituted 20,000 acres of undeveloped land, to a limited partnership for $50 million. The land had originally cost Hogback $5 million. The terms of the sale included a cash payment of $9 million and a 10% note for $41 million
On January 1, 2007 the Hadad Company entered into a consignment agreement with the Trinidad Company. The agreement specifies that the consignee (Trinidad) is to sell the merchandise at a price of 30% above cost. Trinidad is required to pay Hadad the net sales price within 15 days of each sale to a
The earning of revenue by a company is recognized for accounting purposes when the transaction is recorded. In some situations, revenue is recognized approximately as it is earned in the economic sense; in others, accountants have developed guidelines for recognizing revenue by other criteria, for
In special cases, revenue is recognized by the use of several methods, including (a) Percentage-of-completion method, (b) Proportional performance method, and (c) Installment method.RequiredBriefly explain each of the methods and indicate the situations in which each is used.
Village Company is accounting for a long-term construction contract using the percentage of- completion method. It is a three-year, fixed-fee contract that is presently in its first year. The latest reasonable estimates of total contract costs indicate that the contract will be completed at a
In accounting for long-term contracts (those taking longer than one year to complete), the two methods commonly followed are the percentage-of completion method and the completed-contract method.Required1. Explain how earnings on long-term contracts are recognized and computed under these two
Installment sales usually are accounted for by one of the following methods: (1) The profit may be recognized as earned in the period of sale; (2) The profit may be recognized on a proportionate basis in the periods of collection (commonly called the “installment method”).Required1. Discuss the
The following situations are independent.1. Carlson Company is an international consulting firm that has received a two-year engagement from a client for a fee of $2 million. The company will assign differing numbers of personnel to the project depending on the needs of the project and the
Bonanza Trading Stamps, Inc. was formed early this year to sell trading stamps throughout the Southwest to retailers who distribute them free to their customers. Books for accumulating the stamps and catalogs illustrating the merchandise for which the stamps may be exchanged are given free to
Certain business “exchanges” are very complex and may qualify as exceptional cases in which the related revenues and expenses are advanced or deferred. The following are four such cases:1. Franchisor grants a franchise to a franchisee; it collects part of the initial franchise fee and agrees to
At December 31, 2007, Roko Co. has two fixed price construction contracts in progress. Both contracts have monthly billings supported by certified surveys of work completed. The contracts are: a. The Ski Park contract, begun in 2006, is 80% complete, is progressing according to bid estimates, and
Southern Fried Shrimp sells franchises to independent operators throughout the southeastern part of the United States. The contract with the franchisee includes the following provisions:1. The franchisee is charged an initial fee of $25,000. Of this amount, $5,000 is payable when the agreement is
After the presentation of your report on the examination of the financial statements to the board of directors of the Savage Publishing Company, one of the new directors says he is surprised the income statement assumes that an equal proportion of the revenue is earned with the publication of
On May 6, 2006, Sterling Corporation signed a contract with Stony Associates under which Stony agreed (1) to construct an office building on land owned by Sterling, (2) to accept responsibility for procuring financing for the project and finding tenants, and (3) to manage the property for 50 years.
Kwik-Bild Corporation sells and erects shell houses. These are frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding and ceiling joists. Shell houses are sold chiefly to customers who are handy with tools and who have
On October 2, 2007 the Television Company sold a set costing $400 to Jones for $600. Jones made a down payment of $150 and agreed to pay $25 the first of each month for 18 months thereafter. Jones paid the first two installments due on November 1 and December 1, 2007. In 2008 Jones made five
Refer to the financial statements and related notes of The Coca-Cola Company in Appendix A of this book. Required1. What does the company disclose about its revenue recognition policies? Why?2. When does the company expense the production cost of its advertisements? Does this result in appropriate
You are employed by a local CPA firm, and one of your clients is Tiger Manufacturing Company. Tiger has been very successful in recent years, averaging approximately 10% increase in earnings each year. The company is planning a public stock offering early next year, which would bring significant
Situation When asked about a $518 million “prepaid expense and deferred charge” on its balance sheet for 1990, Sears says that about $100 million of the figure—mainly for the catalog— consists of advertising costs whose impact on profit has been deferred. “These costs are paid but
Situation Amre Inc. capitalized its marketing costs, such as the cost of purchasing mailing lists, instead of treating the costs as expenses. Inspeech capitalized estimated selling, general, and administrative costs of various acquired companies’ accounting and billing activities for a period of
Distinguish between the objectives of financial reporting and the Internal Revenue Code.
Identify the five groups of possible differences between pretax financial income and taxable income (or between income tax expense and income taxes payable).
What is a permanent difference? Give two examples.
What is a temporary difference? Give two examples.
What did the FASB conclude in FASB Statement No. 109 regarding interperiod income tax allocation?
What are the two objectives of accounting for income taxes identified in FASB Statement No. 109?
How does a corporation determine its deferred taxes under generally accepted accounting principles?
What are the three characteristics of a liability and why does a deferred tax liability of a corporation meet these characteristics?
What are the three characteristics of an asset and why does a deferred tax asset of a corporation meet these characteristics?
When does a corporation establish a valuation allowance? Give an example of positive evidence that might be used to justify that a valuation allowance is not needed.
List the steps necessary to measure and record a corporation’s current and deferred income taxes.
Describe an operating loss carryback. List the two conceptual questions concerning accounting for a carryback.
Describe an operating loss carryforward. List the two conceptual questions concerning accounting for a carryforward.
Briefly summarize the generally accepted accounting principles for the financial reporting of operating loss carrybacks and carryforwards.

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