Contract Price $2,000,000 $2,000,000

Exercise 4-1

Requirement 1 2000 2001 Contract price $2,000,000 $2,000,000 Actual costs to date 300,000 1,875,000 Estimated costs to complete 1,200,000 - 0 - Total estimated costs 1,500,000 1,875,000 Estimated gross profit $ 500,000 $ 125,000

Gross profit recognition: 2000: $ 300,000 = 20% x $500,000 = $100,000 $1,500,000

2001: $125,000 - $100,000 = $25,000

Requirement 2 2000 $ - 0 - 2001 $125,000

Requirement 3

Balance Sheet At December 31, 2000 Current assets: Accounts receivable $ 110,000 Construction in progress $400,000* Less: Billings (360,000) Costs and profit in excess of billings 40,000

* Costs ($300,000) + profits ($100,000) Exercise 4-1 (concluded)

Requirement 4

Balance Sheet At December 31, 2000 Current assets: Accounts receivable $ 110,000

Current liabilities: Billings ($360,000) in excess of costs ($300,000) $ 60,000 Exercise 4-4 Situation 1 - Percentage-of-Completion

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 1,500,000 3,600,000 4,500,000 Estimated costs to complete 3,000,000 900,000 - 0 - Total estimated costs 4,500,000 4,500,000 4,500,000 Estimated gross profit (loss) $ 500,000 $ 500,000 $ 500,000

Gross profit (loss) recognized:

2000: $1,500,000 = 33.3333% x $500,000 = $166,667 $4,500,000

2001: $3,600,000 = 80.0% x $500,000 = $400,000 - 166,667 = $233,333 $4,500,000

2002: $500,000 - 400,000 = $100,000

Situation 1 - Completed Contract

Year Gross profit recognized 2000 - 0 - 2001 - 0 - 2002 $500,000 Total gross profit $500,000 Exercise 4-4 (continued)

Situation 2 - Percentage-of-Completion

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 1,500,000 2,400,000 4,800,000 Estimated costs to complete 3,000,000 2,400,000 - 0 - Total estimated costs 4,500,000 4,800,000 4,800,000 Estimated gross profit (loss) $ 500,000 $ 200,000 $ 200,000

2000: $1,500,000 = 33.3333% x $500,000 = $166,667 $4,500,000

2001: $2,400,000 = 50.0% x $200,000 = $100,000 - 166,667 = $(66,667) $4,800,000

2002: $200,000 - 100,000 = $100,000

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 1,500,000 3,600,000 5,200,000 Estimated costs to complete 3,000,000 1,500,000 - 0 - Total estimated costs 4,500,000 5,100,000 5,200,000 Estimated gross profit (loss) $ 500,000 $ (100,000 ) $ (200,000 )

2000: $1,500,000 = 33.3333% x $500,000 = $166,667 $4,500,000

2001: $(100,000) - 166,667 = $(266,667)

2002: $(200,000) - (100,000) = $(100,000)

Year Gross profit (loss) recognized 2000 - 0 - 2001 $(100,000) 2002 (100,000 ) Total project loss $(200,000 ) Exercise 4-4 (continued)

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 4,500,000 Estimated costs to complete 3,500,000 875,000 - 0 - Total estimated costs 4,000,000 4,375,000 4,500,000 Estimated gross profit (loss) $1,000,000 $ 625,000 $ 500,000

2000: $ 500,000 = 12.5% x $1,000,000 = $125,000 $4,000,000

2001: $3,500,000 = 80.0% x $625,000 = $500,000 - 125,000 = $375,000 $4,375,000

2002: $500,000 - 500,000 = $ - 0 -

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 4,800,000 Estimated costs to complete 3,500,000 1,500,000 - 0 - Total estimated costs 4,000,000 5,000,000 4,800,000 Estimated gross profit (loss) $1,000,000 $ - 0 - $ 200,000

2000: $ 500,000 = 12.5% x $1,000,000 = $125,000 $4,000,000

2001: $ 0 - 125,000 = $(125,000)

2002: $200,000 - 0 = $200,000

Year Gross profit recognized 2000 - 0 - 2001 - 0 - 2002 $200,000 Total gross profit $200,000 Exercise 4-4 (concluded)

2000 2001 2002 Contract price $5,000,000 $5,000,000 $5,000,000 Actual costs to date 500,000 3,500,000 5,300,000 Estimated costs to complete 4,600,000 1,700,000 - 0 - Total estimated costs 5,100,000 5,200,000 5,300,000 Estimated gross profit (loss) $ (100,000 ) $ (200,000 ) $ (300,000 )

2000: $(100,000)

2001: $(200,000) - (100,000) = $(100,000)

2002: $(300,000) - (200,000) = $(100,000)

Year Gross profit (loss) recognized 2000 $(100,000) 2001 (100,000) 2002 (100,000) Total project loss $(300,000 ) Exercise 4-9

Requirement 1

July 1, 2000 To record installment sale Installment receivables...... 300,000 ...... Sales revenue ...... 300,000

Cost of goods sold...... 120,000 ...... Inventory ...... 120,000

To record cash collection from installment sale Cash...... 75,000 ...... Installment receivables ...... 75,000

July 1, 2001 To record cash collection from installment sale Cash...... 75,000 ...... Installment receivables ...... 75,000 Exercise 4-9 (continued)

Requirement 2

July 1, 2000 To record installment sale Installment receivables...... 300,000 ...... Inventory ...... 120,000 ...... Deferred gross profit ...... 180,000

To recognize gross profit from installment sale Deferred gross profit...... 45,000 ...... Realized gross profit ...... 45,000

July 1, 2001 To record cash collection from installment sale Cash...... 75,000 ...... Installment receivables ...... 75,000

To recognize gross profit from installment sale Deferred gross profit...... 45,000 ...... Realized gross profit ...... 45,000 Exercise 4-9 (concluded)

Requirement 3

July 1, 2000 To record installment sale Installment receivables...... 300,000 ...... Inventory ...... 120,000 ...... Deferred gross profit ...... 180,000

July 1, 2001 To record cash collection from installment sale Cash...... 75,000 ...... Installment receivables ...... 75,000

To recognize gross profit from installment sale Deferred gross profit...... 30,000 ...... Realized gross profit ...... 30,000

Problem 4-2

Requirement 1 2000 2001 2002 Contract price $10,000,000 $10,000,000 $10,000,000 Actual costs to date 2,400,000 6,000,000 8,200,000 Estimated costs to complete 5,600,000 2,000,000 - 0 - Total estimated costs 8,000,000 8,000,000 8,200,000 Estimated gross profit (loss) $ 2,000,000 $ 2,000,000 $ 1,800,000 Gross profit (loss) recognition: 2000: $2,400,000 = 30.0% x $2,000,000 = $600,000 $8,000,000 Problem 4-2 (continued)

2001: $6,000,000 = 75.0% x $2,000,000 = $1,500,000 - 600,000 = $900,000 $8,000,000 2002: $1,800,000 - 1,500,000 = $300,000

Requirement 2

2000 2001 2002 Construction in progress 2,400,000 3,600,000 2,200,000 Various accounts 2,400,000 3,600,000 2,200,000 To record construction costs.

Accounts receivable 2,000,000 4,000,000 4,000,000 Billings on construction contract 2,000,000 4,000,000 4,000,000 To record progress billings.

Cash 1,800,000 3,600,000 4,600,000 Accounts receivable 1,800,000 3,600,000 4,600,000 To record cash collections.

Construction in progress (gross profit) 600,000 900,000 300,000 Cost of construction (cost incurred) 2,400,000 3,600,000 2,200,000

Revenue from long-term contracts (1) 3,000,000 4,500,000 2,500,000 To record gross profit. Problem 4-2 (continued)

(1) Revenue recognized: 2000: 30% x $10,000,000 = $3,000,000 2001: 75% x $10,000,000 = $7,500,000 Less: Revenue recognized in 2000 (3,000,000) Revenue recognized in 2001 $4,500,000 2002: 100% x $10,000,000 = $10,000,000 Less: Revenue recognized in 2000 & 2001 (7,500,000) Revenue recognized in 2002 $2,500,000

Requirement 3

Balance Sheet 2000 2001

Current assets: Accounts receivable $ 200,000 $600,000 Construction in progress $3,000,000 $7,500,000 Less: Billings (2,000,000 ) (6,000,000) Costs and profit in excess of billings 1,000,000 1,500,000

Requirement 4 2000 2001 1999 Costs incurred during the year $2,400,000 $3,800,000 $3,200,000 Estimated costs to complete as of year-end 5,600,000 3,100,000 -

2000 2001 1999 Contract price $10,000,000 $10,000,000 $10,000,000 Actual costs to date 2,400,000 6,200,000 9,400,000 Estimated costs to complete 5,600,000 3,100,000 - 0 - Total estimated costs 8,000,000 9,300,000 9,400,000 Estimated gross profit (loss) $ 2,000,000 $ 700,000 $ 600,000 Problem 4-2 (concluded)

Gross profit (loss) recognition: 2000: $2,400,000 = 30.0% x $2,000,000 = $600,000 $8,000,000

2001: $6,200,000 = 66.6667% x $700,000 = $466,667 - 600,000 = $(133,333) $9,300,000

2002: $600,000 - 466,667 = $133,333

Requirement 5 2000 2001 2002 Costs incurred during the year $2,400,000 $3,800,000 $3,900,000 Estimated costs to complete as of year-end 5,600,000 4,100,000 -

2000 2001 2002 Contract price $10,000,000 $10,000,000 $10,000,000 Actual costs to date 2,400,000 6,200,000 10,100,000 Estimated costs to complete 5,600,000 4,100,000 - 0 - Total estimated costs 8,000,000 10,300,000 10,100,000 Estimated gross profit (loss) $ 2,000,000 $ (300,000 ) $ (100,000 )

Gross profit (loss) recognition:

2000: $2,400,000 = 30.0% x $2,000,000 = $600,000 $8,000,000

2001: $(300,000) - 600,000 = $(900,000)

2002: $(100,000) - (300,000) = $200,000 Problem 4-8

1. Inventory turnover ratio $6,300 ÷ [($800 + 600) ÷ 2] = 9.0 2. Average days in inventory 365 ÷ 9.0 = 40.56 days 3. Receivables turnover ratio $9,000 ÷ [($600 + 400) ÷ 2] = 18.0 4. Average collection period 365 ÷ 18.0 = 20.28 days 5. Asset turnover ratio $9,000 ÷ [($4,000 + 3,600) ÷ 2] = 2.37 6. Profit margin on sales $300 ÷ $9,000 = 3.33% 7. Return on assets $300 ÷ [($4,000 + 3,600) ÷ 2] = 7.89% or: 3.33% x 2.37 times = 7.89% 8. Return on shareholders’ equity $300 ÷ [($1,500 + 1,350) ÷ 2] = 21.1%