Connect Homework 3

Chapter 4 1. The following is a partial year-end adjusted trial balance. Account Title Debits Credits Sales revenue 430,000 Loss on sale of investments 48,000 Interest revenue 5,000 Loss from flood damage (unusual and infrequent) 56,500 Cost of goods sold 225,000 General and administrative expenses 53,000 Restructuring costs 63,000 Selling expenses 31,500 Income tax expense 0 Income tax expense has not yet been accrued. The income tax rate is 40%. a. Determine the operating income (loss). $57,500 b. Determine the income (loss) before any separately reported items. $8,700 c. Determine the net income (loss). $(25,200) 2. The following are partial income statement account balances taken from the December 31, 2013, year-end trial balance of White and Sons, Inc.: restructuring costs, $330,000; interest revenue, $43,000; loss from earthquake (unusual and infrequent), $430,000; and loss on sale of investments, $53,000. Income tax expense has not yet been accrued. The income tax rate is 40%. Prepare the lower portion of the 2013 income statement beginning with $865,000 income before income taxes and extraordinary item. Include appropriate basic EPS disclosures. The company had 150,000 shares of common stock outstanding throughout the year. (Amounts to be deducted should be indicated with a minus sign. Round your "EPS" answers to 2 decimal places.) White And Sons, Inc. Partial Income Statement For the Year Ended December 31, 2013 Income before income taxes and extraordinary item $865,000 Income tax expense (346,000) Income before extraordinary item 519,000 Extraordinary item gain (loss): Loss from earthquake (258,000) Net income $261,000 Earnings per share: Income before extraordinary item $3.46 Gain (Loss from earthquake) (1.72) Earnings per share $1.74

3. On December 31, 2013, the end of the fiscal year, California Microtech Corporation completed the sale of its semiconductor business for $20 million. The business segment qualifies as a component of the entity according to GAAP. The book value of the assets of the segment was $19 million. The loss from operations of the segment during 2013 was $3.3 million. Pretax income from continuing operations for the year totaled $6.1 million. The income tax rate is 40%. Prepare the lower portion of the 2013 income statement beginning with pretax income from continuing operations. Ignore EPS disclosures. (Amounts to be deducted and negative amounts should be indicated with a minus sign. Enter your answers in whole dollars.)

California Microtech Corporation Partial Income Statement For the Year Ended December 31, 2013 Income from continuing operations before income taxes $6,100,000 Income tax expense (2,440,000) Income from continuing operations 3,660,000 Discontinued operations gain (loss): Loss from operations of discontinued component (2,300,000) Income tax benefit 920,000 Loss on discontinued operations (1,380,000) Net income $2,280,000 4. The following is a partial trial balance for General Lighting Corporation as of December 31, 2013: Account Title Debits Credits Sales revenue 3,300,000 Rental revenue 99,000 Loss on sale of investments 32,000 Loss from flood damage (event is both unusual and infrequent) 310,000 Cost of goods sold 1,380,000 Loss from write-down of inventory due to obsolescence 390,000 Selling expenses 490,000 General and administrative expenses 245,000 Interest expense 98,000 300,000 shares of common stock were outstanding throughout 2013. Income tax expense has not yet been accrued. The income tax rate is 40%. Required: 1. Prepare a single-step income statement for 2013, including EPS disclosures. (Round EPS answers to 2 decimal places.) General Lighting Corporation Income Statement For the Year Ended Dec 31, 2013 Revenues and gains: Sales revenue $3,300,000 Rental revenue 99,000

Total revenues and gains 3,399,000 Expenses and losses: Loss on sale of investments $32,000 Cost of goods sold 1,380,000 Loss from write-down of inventory 390,000 Selling expenses 490,000 General and administrative expenses 245,000 Interest expense 98,000 Total expenses and losses 2,635,000 Income before income taxes and extraordinary item 764,000 Income tax expense (305,600) Income before extraordinary item 458,400 Extraordinary item gain (loss): Loss from flood damage (186,000) Net income 272,400 Earnings per share: Income before extraordinary item 1.53 Extraordinary loss (0.62) Net income 0.91 2. Prepare a multiple-step income statement for 2013, including EPS disclosures. (Round EPS answers to 2 decimal places.) General Lighting Corporation Income Statement For the Year Ended Dec 31, 2013 Sales revenue $3,300,000 Cost of goods sold (1,380,000) Gross profit 1,920,000 Operating expenses:

Loss from inventory write-down 390,000 Selling expenses 490,000 General and administrative expenses 245,000 Total operating expenses 1,125,000

Operating income 795,000 Other income (expense): Rental revenue 99,000 Interest expense (98,000) Loss on sale of investments (32,000) Total other income (expense), net (31,000) Income before income taxes and extraordinary item 764,000 Income tax expense (305,600) Income before extraordinary item 458,400 Extraordinary item gain (loss): Loss from flood damage (186,000) Net income 272,400 Earnings per share: Income before extraordinary item 1.53

Extraordinary loss (0.62) Net income 0.91 5. Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2013, the company adopted a plan to sell the assets of the division. The actual sale was completed on December 15, 2013, at a price of $600,000. The book value of the division’s assets was $1,000,000, resulting in a before-tax loss of $400,000 on the sale. The division incurred a before-tax operating loss from operations of $130,000 from the beginning of the year through December 15. The income tax rate is 40%. Chance’s after-tax income from its continuing operations is $350,000. Required: Prepare an income statement for 2013 beginning with income from continuing operations. Include appropriate EPS disclosures assuming that 100,000 shares of common stock were outstanding throughout the year. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

Chance Company Partial Income Statement

For the Year Ended December 31, 2013 Income from continuing operations $350,000 Discontinued operations gain (loss): Loss from operations of discontinued component (530,000) Income tax benefit 212,000 Loss on discontinued operations (318,000) Net income 32,000 Earnings per share: Income from continuing operations 3.50 Loss from discontinued operations (3.18) Net income $0.32 6. Kandon Enterprises, Inc., has two operating divisions; one manufactures machinery and the other breeds and sells horses. Both divisions are considered separate components as defined by generally accepted accounting principles. The horse division has been unprofitable, and on November 15, 2013, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2014. At December 31, 2013, the component was considered held for sale. On December 31, 2013, the company’s fiscal year-end, the book value of the assets of the horse division was $250,000. On that date, the fair value of the assets, less costs to sell, was $200,000. The before-tax loss from operations of the division for the year was $140,000. The company’s effective tax rate is 40%. The after-tax income from continuing operations for 2013 was $400,000. Required:

1. Prepare a partial income statement for 2013 beginning with income from continuing operations. Ignore EPS disclosures. (Amounts to be deducted should be indicated with a minus sign.)

Kandon Enterprises, Inc. Partial Income Statement

For the Year Ended December 31, 2013 Income from continuing operations $400,000 Discontinued operations gain (loss): Loss from operations of discontinued component (190,000) Income tax benefit 76,000 Loss on discontinued operations (114,000) Net income $286,000 2. Prepare a partial income statement for 2013 beginning with income from continuing operations. Assuming that the estimated net fair value of the horse division’s assets was $400,000, instead of $200,000. (Amounts to be deducted should be indicated with a minus sign.)

Kandon Enterprises, Inc. Partial Income Statement

For the Year Ended December 31, 2013 Income from continuing operations $400,000 Discontinued operations gain (loss): Loss from operations of discontinued component (140,000) Income tax benefit 56,000 Loss on discontinued operations (84,000) Net income $316,000 7. Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31): 2013 2012 Sales $4,500,000 $3,600,000 Cost of goods sold 2,880,000 2,020,000 Administrative expenses 820,000 695,000 Selling expenses 380,000 332,000 Interest revenue 152,000 142,000 Interest expense 204,000 204,000 Loss on sale of assets of discontinued component 58,000 — On July 1, 2013, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2013, for $58,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows: 1/1/13-9/30/13 2012 Sales $420,000 $520,000 Cost of goods sold (300,000) (332,000) Administrative expenses (52,000) (42,000) Selling expenses (22,000) (32,000)

Operating income before taxes $46,000 $114,000 In addition to the account balances above, several events occurred during 2013 that have not yet been reflected in the above accounts: 1. A fire caused $52,000 in uninsured damages to the main office building. The fire was considered to be an infrequent but not unusual event. 2. An earthquake caused $102,000 in property damage to one of Reed’s factories. The amount of the loss is material and the event is considered unusual and infrequent. 3. Inventory that had cost $42,000 had become obsolete because a competitor introduced a better product. The inventory was sold as scrap for $5,000. 4. Income taxes have not yet been accrued. Required: Prepare a multiple-step income statement for the Reed Company for 2013, showing 2012 information in comparative format, including income taxes computed at 40% and EPS disclosures assuming 300,000 shares of common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

REED Company Comparative Income Statements

For the Years Ended December 31 2013 2012 Sales revenue $4,080,000 $3,080,000 Cost of goods sold (2,580,000) (1,688,000) Gross profit (loss) 1,500,000 1,392,000 Operating expenses: Administrative 768,000 653,000 Selling 358,000 300,000 Loss from fire damage 52,000 0 Loss from write-down of obsolete inventory 37,000 0 Total operating expenses 1,215,000 953,000 Operating income 285,000 439,000 Other income (expense): Interest revenue 152,000 142,000 Interest expense (204,000) (204,000) Total other expenses (net) (52,000) (62,000) Income from continuing operations before income taxes

and extraordinary item 233,000 377,000 Income tax expense (93,200) (150,800) Income from continuing operations before extraordinary item 139,800 226,200 Discontinued operations gain (loss): Income (loss) from operations of discontinued

component (12,000) 114,000 Income tax benefit (expense) 4,800 (45,600) Income (loss) on discontinued operations (7,200) 68,400 Income before extraordinary item 132,600 294,600 Extraordinary gain (loss): Loss from earthquake (61,200) 0

Net income (loss) 71,400 294,600 Earnings per share: Income from continuing operations before extraordinary item 0.47 0.75 Discontinued operations (0.02) 0.23 Extraordinary loss (0.20) 0 Net income (loss) $0.23 $0.98 8. For the year ending December 31, 2013, Micron Corporation had income from continuing operations before taxes of $1,390,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material. 1. During 2013, one of Micron’s factories was damaged in an earthquake. As a result, the firm recognized a loss of $819,000. The event is considered unusual and infrequent. 2. In November 2013, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May 2013. The income from operations of the chain from January 1, 2013, through November was $179,000 and the loss on sale of the chain’s assets was $338,000. 3. In 2013, Micron sold one of its six factories for $1,580,000. At the time of the sale, the factory had a carrying value of $1,290,000. The factory was not considered a component of the entity. 4. In 2011, Micron’s accountant omitted the annual adjustment for patent amortization expense of $139,000. The error was not discovered until December 2013. Required: 1. Prepare Micron’s income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2013. Assume an income tax rate of 40%. Ignore EPS disclosures. (Amounts to be deducted should be indicated with a minus sign.)

Micron Corporation Partial Income Statement

For the Year Ended December 31, 2013 Income from continuing operations before income taxes and extraordinary item $1,680,000 Income tax expense (672,000) Income from continuing operations 1,008,000 Discontinued operations gain (loss): Loss from operations of discontinued component ($159,000) Income tax benefit 63,600 Gain (Loss) on discontinued operations (95,400) Income before extraordinary item 912,600 Extraordinary gain (loss): Loss from earthquake 491,400 Net Income $421,200 2. Select the motivation for segregating certain income statement events from income from continuing operations. Predict the future cash flows 9. The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2013, appears below: Service revenue $960,000

Operating expenses 730,000 Income before income taxes 230,000 Income tax expense 46,000 Net income $184,000 The following balance sheet information also is available: 12/31/13 12/31/12 Cash $348,000 $73,000 Accounts receivable 126,000 103,000 Accounts payable (operating expenses) 76,000 63,000 Income taxes payable 13,000 21,000 In addition, the following transactions took place during the year: 1. Common stock was issued for $106,000 in cash. 2. Long-term investments were sold for $53,000 in cash. The original cost of the investments also was $53,000. 3. $83,000 in cash dividends was paid to shareholders. 4. The company has no outstanding debt, other than those payables listed above. 5. Operating expenses include $33,000 in depreciation expense. Required: 1. Prepare a statement of cash flows for 2013 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. (Amounts to be deducted should be indicated with a minus sign)

Diversified Portfolio Corporation Statement of Cash Flows

For the Year Ended December 31, 2013 Cash flows from operating activities:

Collections from customers 937,000 Payment of income taxes (54,000)

Payment of operating expenses (684,000) Net cash flows from operating activities 199,000 Cash flows from investing activities: Sale of investments 53,000 Net cash flows from investing activities 53,000 Cash flows from financing activities: Proceeds from issue of common stock 106,000 Payment of dividends (83,000) Net cash flows from financing activities 23,000 Increase in cash 275,000 Cash and cash equivalents, January 1 73,000 Cash and cash equivalents, December 31 348,000 2. Prepare the cash flows from operating activities section of Diversified’s 2013 statement of cash flows using the indirect method. (Amounts to be deducted should be indicated with a minus sign)

Diversified Portfolio Corporation Statement of Cash Flows

For the Year Ended December 31, 2013 Cash flows from operating activities: Net income $184,000 Adjustments for noncash effects: Depreciation expense 33,000 Changes in operating assets and liabilities: Decrease in income taxes payable (8,000) Increase in accounts payable 13,000 Increase in accounts receivable (23,000) Net cash flows from operating activities 199,000 Chapter 5 1. On July 1, 2013, Apache Company sold a parcel of undeveloped land to a construction company for $3,100,000. The book value of the land on Apache’s books was $1,240,000. Terms of the sale required a down payment of $124,000 and 24 annual payments of $124,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2014. Apache has no significant obligations to perform services after the sale. How much gross profit will Apache recognize in both 2013 and 2014 assuming point of delivery profit recognition? 2013 2014 Gross Profit $1,860,000 $0 2. In 2013, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2015. Information related to the contract is as follows: 2013 2014 2015 Cost incurred during the year $2,079,000 $3,465,000 $2,371,600 Estimated costs to complete as of year-end 5,621,000 2,156,000 0 Billings during the year 1,700,000 3,844,000 4,456,000 Cash collections during the year 1,530,000 3,300,000 5,170,000 Westgate uses the percentage-of-completion method of accounting for long-term construction contracts. Required: 1. Calculate the amount of gross profit (loss) to be recognized in each of the three years. (Do not round intermediate calculations.) 2013 2014 2015 Gross Profit $621,000 $1,035,000 $428,400 2.1. In the journal below, complete the necessary journal entries for the year 2013 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.) Transaction list:

1. Record construction costs 2. Record progress billings 3. Record cash collections 4. Record gross profit 1 Construction in progress 2,079,000 Various accounts 2,079,000 2 Accounts Receivable 1,700,000 Billings on construction contract 1,700,000 3 Cash 1,530,000 Accounts receivable 1,530,000 4 Construction in progress 621,000 Cost of Construction 2,079,000 Revenue from long-term contracts 2,700,000 2.2. In the journal below, complete the necessary journal entries for the year 2014 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.) Transaction list: 1. Record construction costs 2. Record progress billings 3. Record cash collections 4. Record gross profit 1 Construction in progress 3,465,000 Various accounts 3,465,000 2 Accounts Receivable 3,844,000 Billings on construction contract 3,844,000 3 Cash 3,300,000 Accounts receivable 3,300,000 4 Construction in progress 1,035,000 Cost of Construction 3,465,000 Revenue from long-term contracts 4,500,000 2.3. In the journal below, complete the necessary journal entries for the year 2015 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.) Transaction list: 1. Record construction costs 2. Record progress billings 3. Record cash collections 4. Record gross profit 1 Construction in progress 2,371,600

Various accounts 2,371,600 2 Accounts Receivable 4,465,000 Billings on construction contract 4,465,000 3 Cash 5,170,000 Accounts receivable 5,170,000 4 Construction in progress 428,400 Cost of Construction 2,371,600 Revenue from long-term contracts 2,800,000 3. Complete the information required below to prepare a partial balance sheet for 2013 and 2014 showing any items related to the contract. (Do not round intermediate calculations.) Balance Sheet 2013 2014 Current assets: Accounts receivable $170,000 714,000 Construction in progress 2,700,000 $7,200,000 Less: Billings (1,700,000) (5,544,000) Costs and profit in excess of billings 1,000,000 1,656,000 4. Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information. (Do not round intermediate calculations.) 2013 2014 2015 Costs incurred during the year $2,530,000 $3,865,000 $3,230,000 Estimated costs to complete as of year-end 5,730,000 3,230,000 0 2013 2014 2015 Gross Profit $532,954 ($283,798) $125,844 5. Calculate the amount of gross profit (loss) to be recognized in each of the three years, assuming the following costs incurred and costs to complete information. (Do not round intermediate calculations.) 2013 2014 2015 Costs incurred during the year $2,530,000 $3,865,000 $4,095,000 Estimated costs to complete as of year-end 5,730,000 4,230,000 0 2013 2014 2015 Gross Profit $532,954 ($1,157,954) $135,000 3. Charter Corporation, which began business in 2013, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2013 and 2014: 2013 2014 Installment sales $450,000 $440,000 Cost of installment sales 360,000 396,000 Cash collections on installment sales during: 2013 150,000 135,000 2014 — 125,000 Required:

1. How much gross profit should Charter recognize in 2013 and 2014 from installment sales? 2013 2014 Gross Profit $30,000 $39,500 2. What should be the balance in the deferred gross profit account at the end of 2013 and 2014? 2013 2014 Balance in deferred gross profit account $60,000 $64,500 4. On July 1, 2013, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2014. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $120,000. The company uses the perpetual inventory system. Required: 1. Prepare the necessary journal entries for 2013 and 2014 using point of delivery revenue recognition. Ignore interest charges. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Prepare any necessary journal entry for 2013 to account for the installment sale using the point of delivery method 2. Prepare any necessary journal entry for 2013 to account for the cost of the installment sale using the point of delivery method 3. Prepare any necessary journal entry for 2013 to account for cash collections using the point of delivery method 4. Prepare any necessary journal entry for 2014 for cash collected using the point of delivery method

1 Installment receivables 300,000 Sales revenue 300,000 2 Cost of goods sold 120,000 Inventory 120,000 3 Cash 75,000 Installment receivables 75,000 4 Cash 75,000 Installment receivables 75,000 2. Prepare the necessary journal entries for 2013 and 2014, applying the installment sales method. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Prepare any necessary journal entry for 2013 to account for the installment sale using the installment sales method

2. Prepare any necessary journal entry for 2013 to account for the cash collections using the installment sales method 3. Prepare any necessary journal entry for 2013 to recognize gross profit using the installment sales method 4. Prepare any necessary journal entry for 2014 to record cash collections using the installment sales method 5. Prepare any necessary journal entry for 2014 to recognize gross profit using the installment sales method

1 Installment receivables 300,000 Inventory 120,000 Deferred gross profit 180,000 2 Cash 75,000 Installment receivables 75,000 3 Deferred gross profit 45,000 Realized gross profit 45,000 4 Cash 75,000 Installment receivables 75,000 5 Deferred gross profit 45,000 Realized gross profit 45,000 3. Prepare the necessary journal entries for 2013 and 2014, applying the cost recovery method. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Prepare any necessary journal entry for 2013 to account for the installment sale using the cost recovery method 2. Prepare any necessary journal entry for 2013 to account for the cash collections using the cost recovery method 3. Prepare any necessary journal entry for 2014 to account for the cash collection using the cost recovery method 4. Prepare any necessary journal entry for 2014 to recognize gross profit using the cost recovery method

1 Installment receivables 300,000 Inventory 120,000 Deferred gross profit 180,000 2 Cash 75,000 Installment receivables 75,000 3 Cash 75,000 Installment receivables 75,000 4 Deferred gross profit 30,000 Realized gross profit 30,000 5. Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2013 and was completed in 2014. Data relating to the contract are summarized below:

2013 2014 Costs incurred during the year $300,000 $1,575,000 Estimated costs to complete as of 12/31 1,200,000 0 Billings during the year 380,000 1,620,000 Cash collections during the year 250,000 1,750,000 Required: 1. Compute the amount of gross profit or loss to be recognized in 2013 and 2014 using the percentage-of-completion method. 2013 2014 Contract price $2,000,000 $2,000,000 Actual costs to date 300,000 1,875,000 Estimate cots to complete 1,200,000 0 Total estimated costs 1,500,000 1,875,000 Gross profit (estimated in 2013) $500,000 $125,000 Gross profit (loss) to be recognized $100,000 $25,000 2. Compute the amount of gross profit or loss to be recognized in 2013 and 2014 using the completed contract method. Gross Profit (Loss) 2013 $0 2014 $125,000 3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2013 using the percentage-of-completion method. Balance Sheet At December 31, 2013 Current assets: Costs and profit in excess of billings $20,000 Accounts receivable $130,000 4. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2013 using the completed contract method. Balance Sheet At December 31, 2013 Current assets: Accounts receivable $130,000 Current liabilities: Billings in excess of costs $80,000 6. On June 15, 2013, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of 2015, just in time for the 2015 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2013 2014 2015 Costs incurred during the year $40 $80 $50 Estimated costs to complete as of 12/31 120 60 —

Required: 1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage-of-completion method. (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) 2013 2014 2015 ($ in millions) Contract price $220 $220 $220 Actual costs to date 40 120 170 Estimate cots to complete 120 60 0 Total estimated costs 160 180 170 Gross profit (actual in 2015) 60 40 50 Gross profit (loss) to be recognized $15 $11.67 $23.32 2. How much revenue will Sanderson report in each of three years using the percentage-of-completion method? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) Year Revenue reported 2013 $55.00 million 2014 $91.67 million 2015 $73.32 million 3. Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method. (Enter your answers in millions.) Year Gross Profit (Loss) 2013 $0 million 2014 $0 million 2015 $50 million Total project income $50 million 4. Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate. (Enter your answers in millions.) 2013 2014 2015 ($ in millions) Revenue $40 $80 $100 Costs 40 80 50 Gross profit (loss) to be recognized $0 $0 $50 5. Suppose the estimated costs to complete at the end of 2014 are $80 million instead of $60 million. Determine the amount of gross profit or loss to be recognized in 2014 using the percentage-of-completion method. (Enter your answer in millions. Do not round intermediate calculations.) 2014 Gross profit (loss) to be recognized ($3) million

7. Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2013 and 2014 is as follows: 2013 2014 Sales $320,000 $420,000 Cost of sales 224,000 273,000 Customer collections on: 2013 sales 130,000 110,000 2014 sales 160,000 Required: 1. Calculate the amount of gross profit that would be recognized each year from installment sales. 2013 2014 Gross profit $39,000 $89,000 2.1. Prepare all necessary journal entries for the year 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record installment sales 2. Record cash collections from installment sales 3. Record the gross profit from the installment sales 1 Installment receivables 320,000 Inventory 224,000 Deferred gross profit 96,000 2 Cash 130,000 Installment receivables 130,000 3 Deferred gross profit 39,000 Realized gross profit 39,000 2.2. Prepare all necessary journal entries for the year 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record installment sales 2. Record cash collections from installment sales 3. Record the gross profit from the installment sales 1 Installment receivables 420,000 Inventory 273,000 Deferred gross profit 147,000 2 Cash 270,000 Installment receivables 270,000 3 Deferred gross profit 89,000 Realized gross profit 89,000

Assume that Ajax uses the cost recovery method to account for its installment sales. 3.1. Compute the following: Date Cash Collected Cost Recovery Gross Profit 2013: 2013 sales $130,000 $130,000 $0 2014: 2013 sales $110,000 $94,000 $16,000 2014 sales 160,000 160,000 $0 2014 totals $270,000 $254,000 $16,000 3.2. Prepare all necessary journal entries for the year 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record installment sales 2. Record cash collections from installment sales 3. Record the gross profit from the installment sales 1 Installment receivables 320,000 Inventory 224,000 Deferred gross profit 96,000 2 Cash 130,000 Installment receivables 130,000 3 No journal entry required 3.3. Prepare all necessary journal entries for the year 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record installment sales 2. Record cash collections from installment sales 3. Record the gross profit from the installment sales 1 Installment receivables 420,000 Inventory 273,000 Deferred gross profit 147,000 2 Cash 270,000 Installment receivables 270,000 3 Deferred gross profit 16,000 Realized gross profit 16,000 8. In 2013, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2015. Information related to the contract is as follows: 2013 2014 2015 Cost incurred during the year $2,975,000 $3,825,000 $1,870,000 Estimated costs to complete as of year-end 5,525,000 1,700,000 0 Billings during the year 2,500,000 4,300,000 3,200,000

Cash collections during the year 2,250,000 4,100,000 3,600,000 Westgate uses the completed contract method of accounting for long-term construction contracts. Required: 1. Calculate the amount of gross profit (loss) to be recognized in each of the three years. 2013 2014 2015 Gross profit $0 $0 $1,330,000 2.1. In the journal below, complete the necessary journal entries for the year 2013 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record the construction costs 2. Record the progress billings 3. Record the cash collections 4. Record the gross profit 1 Construction in progress 2,975,000 Various accounts 2,975,000 2 Accounts receivable 2,500,000 Billings on construction contract 2,500,000 3 Cash 2,250,000 Accounts receivable 2,250,000

4 No journal entry required 2.2. In the journal below, complete the necessary journal entries for the year 2014 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record the construction costs 2. Record the progress billings 3. Record the cash collections 4. Record the gross profit 1 Construction in progress 3,825,000 Various accounts 3,825,000 2 Accounts receivable 4,300,000 Billings on construction contract 4,300,000 3 Cash 4,100,000 Accounts receivable 4,100,000 4 No journal entry required

2.3. In the journal below, complete the necessary journal entries for the year 2015 (credit various accounts for construction costs incurred). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Transaction list: 1. Record the construction costs 2. Record the progress billings 3. Record the cash collections 4. Record the gross profit 1 Construction in progress 1,870,000 Various accounts 1,870,000 2 Accounts receivable 3,200,000 Billings on construction contract 3,200,000 3 Cash 3,600,000 Accounts receivable 3,600,000

4 Construction in progress 1,330,000 Cost of construction 8,670,000 Revenue from long-term contracts 10,000,000 3. Complete the information required below to prepare a partial balance sheet for 2013 and 2014 showing any items related to the contract. Balance Sheet 2013 2014 Current assets: Accounts receivable $250,000 $450,000 Construction in progress $2,975,000 $6,800,000 Less: Billings (2,500,000) (6,800,000) Costs in excess of billings $475,000 $0 4. Calculate the amount of gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information. 2013 2014 2015 Costs incurred during the year $2,450,000 $3,825,000 $3,250,000 Estimated costs to complete as of year-end 5,650,000 3,150,000 0 2013 2014 2015 Gross profit $0 $0 $475,000 5. Calculate the amount of gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information. 2013 2014 2015 Costs incurred during the year $2,450,000 $3,825,000 $3,975,000 Estimated costs to complete as of year-end 5,650,000 4,150,000 0 2013 2014 2015 Gross profit $0 ($425,000) $175,000 9. Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry—Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts).

Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.

Balance Sheets ($ in millions, except per share data)

J&J Pfizer Assets: Cash $5,377 $1,520 Short-term investments 4,146 10,432 Accounts receivable (net) 6,574 8,775 Inventories 3,588 5,837 Other current assets 3,310 3,177 Current assets 22,995 29,741 Property, plant, and equipment (net) 9,846 18,287 Intangibles and other assets 15,422 68,747

Total assets $48,263 $116,775 Liabilities and Shareholders' Equity: Accounts payable $4,966 $2,601 Short-term notes 1,139 8,818 Other current liabilities 7,343 12,238 Current liabilities 13,448 23,657 Long-term debt 2,955 5,755 Other long-term liabilities 4,991 21,986 Total liabilities 21,394 51,398 Capital stock (par and additional paid-in capital) 3,120 67,050 Retained earnings 30,503 29,382 Accumulated other comprehensive income (loss) (590) 195 Less: treasury stock and other equity adjustments (6,164) (31,250) Total shareholders' equity 26,869 65,377 Total liabilities and shareholders' equity $48,263 $116,775 Income Statements Net sales $41,862 $45,188 Cost of goods sold 12,176 9,832 Gross profit 29,686 35,356 Operating expenses 19,763 28,486 Other (income) expense—net (385) 3,610 Income before taxes 10,308 3,260 Tax expense 3,111 1,621 Net income $7,197 $1,639* Basic net income per share $2.42 $0.22 * This is before income from discontinued operations. There were no other separately reported items for either company. Evaluate and compare the two companies by responding to the following questions. Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate. Required:

1.1. Compute the receivables turnover for both the companies. (Round your answers to 2 decimal places.) Receivables turnover J&J 6.37 times Pfizer 5.15 times 1.2. Compute the average collection for both the companies. (Consider 365 days a year. Round your answers to the nearest whole days.) Average collection period J&J 57 days Pfizer 71 days 1.3. Which of the two companies appears more efficient in collecting its accounts receivable? J&J 1.4. Compute the inventory turnover for both the companies. (Round your answers to 2 decimal places.) Inventory turnover J&J 3.39 times Pfizer 1.68 times 1.5. Compute the average days in inventory for both the companies. (Consider 365 days a year. Round your answers to the nearest whole number.) Average days in inventory J&J 108 Pfizer 217 1.6. Which of the two companies appears more efficient in managing its inventory? J&J 2.1. Compute the rate of return on assets for both the companies. (Round your answers to 1 decimal place.) Rate of return on assets J&J 14.9% Pfizer 1.4% 2.2. Which of the two firms had greater earnings relative to resources available? J&J 3.1. Compute the profit margin, asset turnover and return on assets. (Do not round intermediate calculations. The expected format for rounding is presented in each row of the table.) Profit margin (#.##) Asset turnover (#.###) Return on assets (#.#) J&J 17.19% 0.867 times 14.9% Pfizer 3.63% 0.387 times 1.4% 3.2. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover? No

4.1. Compute the rate of return on shareholders’ equity for both the companies. (Round your answers to 1 decimal place.) Shareholders’ equity J&J 26.8% Pfizer 2.5% 4.2. From the perspective of a common shareholder, which of the two firms provided a greater rate of return? J&J 5. Compute the equity multiplier shareholders’ equity for both the companies. (Round your answers to 2 decimal places.) Equity mulitiplier J&J 1.80 Pfizer 1.79