E18-16 (Sales with Repurchase) Cramer Corp. sells idle machinery to Enyart Company on July 1,2014, for $40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2015, for a price of $42,400 (an imputed interest rate of 6%).
(a) Prepare the journal entry for Cramer for the transfer of the asset to Enyart on July 1, 2014.
(b) Prepare any other necessary journal entries for Cramer in 2014.
(c) Prepare the journal entry for Cramer when the machinery is repurchased on June 30, 2015.
P18-11 (Long-Term Contract with Interim Loss) On March 1, 2014,Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2016. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2014, 2015, and 2016 are given below.
2014 2015 2016
Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000
Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0–
Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore incomes taxes.)
CA18-1 (Five-Step Revenue Process) Revenue is recognized based on a five-step process that is applied to a company’s revenue arrangements.
(a) Briefly describe the five-step process.
(b) Explain the importance of contracts when analyzing revenue arrangements.
(c) How are fair value measurement concepts applied in implementation of the five-step process?
(d) How does the five-step process reflect application of the definitions of assets and liabilities?
CA18-2 (Satisfying Performance Obligations) Judy Schaeffer is getting up to speed on the new guidance on revenue recognition. She is trying to understand the revenue recognition principle as it relates to the five-step revenue recognition process.
(a) Describe the revenue recognition principle.
(b) Briefly discuss how the revenue recognition principle relates to the definitions of assets and liabilities. What is the importance of control?
(c) Judy recalls that previous revenue recognition guidance required that revenue not be recognized unless the revenue was realized or realizable (also referred to as collectibility). Is collectibility a consideration in the recognition of revenue? Explain.