Test Buy Ltd. entered into a contract with General Store Inc. on May 1, 2021 for the sale of a commercial air conditioning system. Test Buy agreed to deliver and install the air conditioning system, and train General Stores staff to use the system, for an all-inclusive price of $42,600. On a stand-alone basis, the air conditioner sells for $42,600. The fair value of the installation service for the air conditioner is $2,520. The fair value of the training session is $1,700. The cost of the air conditioning system to Test Buy is $19,750. General Store Inc. is required to pay Test Buy $36,200 on delivery of the air conditioner, with the balance due on installation. On June 17, Test Buy delivered the air conditioner to General Store. However, due to a shortage of available technicians, Test Buy did not install the system until July 1. Test Buy will not provide the training service to General Store staff until August 1. Assume that the air conditioning system, installation, and training are three distinct performance obligations that should be accounted for separately.

Required

1. Allocate the transaction price of $42,600 amongst the performance obligations of the contract. Round all percentage calculations to 2 decimal places. (3.5 marks)
2. Prepare any journal entries required for Test Buy Ltd. for the period of May 1, 2021 to July 1, 2021, assuming that the customer makes all payments on the dates specified in the contract. (4.5 marks)

Question 2 (11 points)

Test Buy Ltd. began work on the construction of a highway for General City during the 2021 year. The contract price for the project was $62,400,000. Test Buy completed construction of the highway on September 4, 2022. The following data pertain to the construction period:

	2021	2022
Actual costs incurred to date	$16,250,000	$33,100,000
Estimated costs to complete	$16,400,000	$0
Progress billings to date	$31,100,000	$62,400,000
Collections to date	$28,750,000	$62,400,000

Test Buy Ltd. has a year end of December 31.

Required:

1. Calculate the gross profit that should be recognized for the 2021 and 2022 years, using the percentage of completion method. Round all percentage calculations to 2 decimal places. (4 marks)
2. Prepare the journal entries for the 2022 year for Test Buy, assuming the percentage of completion method is used. (6 marks)
3. Determine the gross profit to be recognized for the 2021 and 2022 years, assuming the completed contract method is used. (1 mark)

For the following situation, identify the name of the accounting principle that was violated, and how the principle was violated:

The Delaware Real Estate Development Company (DREDC) purchased a parcel of land for $121,000. Five months later, the land was appraised at $168,000. When DREDC prepared its financial statements at December 31, 2021, it valued the land on the balance sheet at $168,000.

For the following situation, identify the name of the accounting principle that was violated, and how the principle was violated:

Karens Kitchen Essentials Co. manufactures and sells a wide variety of kitchen appliances, utensils, and accessories to retail consumers. The companys manufacturing equipment is used for an average of 7 years prior to replacement. The companys controller decides not to record depreciation expense on the manufacturing equipment on an annual basis, when the financial statements are prepared, since this is a time-consuming process. Instead, the entire cost of the equipment is recorded as an expense in the year of replacement.