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Tanner Furniture Company concluded its FIRST year of operations in

which it made sales of \$1,500,000, ALL on installment. Collections

during the year from down payments and installments totaled

\$600,000. Purchases for the year totaled \$900,000; the cost of

merchandise on hand at the end of the year was \$180,000.

INSTRUCTIONS

Using the installment-sales method, make summary entries to record:

(a) the installment sales and cash collections;

(b) the cost of installment sales;

(c) the unrealized gross profit;

(d) the realized gross profit.

6. On February 1, 2003, Miley Contractors agreed to construct a

building at a contract price of \$5,600,000. Miley estimated total

construction costs would be \$4,000,000 and the project would be

finished in 2005. Information relating to the costs and billings for

this contract is as follows:

2003 2004 2005

Total costs incurred to date \$1,500,000 \$2,640,000 \$4,600,000

Estimated costs to complete 2,500,000 1,760,000 -0-

Customer billings to date 2,200,000 4,000,000 5,600,000

Collections to date 2,000,000 3,500,000 5,500,000

INSTRUCTIONS

Fill in the correct amounts on the following schedule. For

percentage-of-completion accounting and for completed-contract

accounting, show the gross profit that should be recorded for 2003,

2004, and 2005.

Percentage-of-Completion Completed-Contract

Gross Profit Gross Profit

2003 ____________ 2003 ____________

2004 ____________ 2004 ____________

2005 ____________ 2005 ____________

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Section 3.Problems

7. Cherry Construction specializes in the construction of commercial

and industrial buildings. The contractor is experienced in bidding

long-term construction projects of this type, with the typical

project lasting fifteen to twenty-four months. The contractor uses

the percentage-of-completion method of revenue recognition since,

given the characteristics of the contractor’s business and con-

tracts, it is the most appropriate method. Progress toward comple-

tion is measured on a cost to cost basis. Cherry began work on a

lump-sum contract at the beginning of 2004. As bid, the statistics

were as follows:

Lump-sum price (contract price) \$4,000,000

Estimated costs

Labor \$ 850,000

Materials and subcontractor 1,750,000

Indirect costs 400,000 3,000,000

\$1,000,000

At the end of the first year, the following was the status of the contract:

Billings to date \$2,230,000

Costs incurred to date

Labor \$ 414,000

Materials and subcontractor 1,098,000

Indirect costs 150,000 1,662,000

Latest forecast total cost 3,000,000

It should be noted that included in the above costs incurred to date

were standard electrical and mechanical materials stored on the job

site, but not yet installed, costing \$102,000. These costs should

not be considered in the costs incurred to date.

INSTRUCTIONS

(a) Compute the percentage of completion on the contract at the end

of 2004.

(b) Indicate the amount of gross profit that would be reported on

this contract at the end of 2004.

(c) Make the journal entry to record the income (loss) for 2004 on

Cherry’s books.

(d) Indicate the account(s) and the amount(s) that would be shown on

the balance sheet of Cherry Construction at the end of 2004

related to its construction accounts. Also indicate where these

items would be classified on the balance sheet. Billings

collected during the year amounted to \$1,960,000.

(e) Assume the latest forecast on total costs at the end of 2004 was

\$4,100,000. How much income (loss) would Cherry report for

the year 2004?