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 advance. Each service contract requires Company X to perform service act 1 a total of 30 times and service act 2 a total of 50 times during the two-year period. At the beginning of 2007, 200 service contracts were sold. The following is a summary of the related cost information for the 200 service contracts:

Initial direct costs .....................$ 8,500

Annual indirect costs ...................9,300

Estimated (and actual) total direct costs (for two-year period) ...20,000

Direct cost per service act

Service act 1 ......................$ 1.60

Service act 2 .......................1.04

During 2007, service act 1 was performed 5,000 times and service act 2 was performed 4,000 times. During 2008, service acts 1 and 2 were performed 1,000 and 6,000 times, respectively. Company Y: Sells goods on the installment basis. Uses the installment method (because these are exceptional cases) to recognize gross profits. The following is a summary of the installment sales, gross profit, operating expenses, and collections for 2007 and 2008:

Company Z: Engages in long-term construction contracts. Uses the percentage-of-completion method to recognize gross profits. Started contract 1 in 2006, contract 2 in 2007, and contract 3 in 2008. The total gross profit (estimated and actual) and the percentage complete for each contract at the end of 2007 through 2009 are:

Required
1. Prepare 2007 and 2008 condensed income statements for Company X.
2. Prepare 2007 and 2008 condensed income statements for Company Y.
3. Prepare a schedule that shows Company Z's gross profit for 2007, 2008, and2009.

Transcribed Image Text:

2007 $90,000 35,100 18,000 2008 Installment method sales Gross profit Operating expenses Cash collections from $110,000 45,100 21,000 2006 installment method sales (2006 gross profit is 40%) 2007 installment method sales 2008 installment method sales 35,000 67,000 23,000 80,000 Contract 1 Contract 2 $800,000 Contract 3 $600,000 Gross profit $350,000 % complete at the end of 2007 2008 2009 75% 100% 40% 7090 100% 35% 80% "3096 was complete at the end of 2006.