Revenue Recognition Alternatives 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:
|
2007 |
2008 |
|
|
Installment method sales |
$90,000 |
$110,000 |
|
Gross profit |
35,100 |
45,100 |
|
Operating expenses |
18,000 |
21,000 |
|
Cash collections from: |
||
|
2006 installment method sales (2006 gross profit is 40%) |
35,000 |
— |
|
2007 installment method sales |
67,000 |
23,000 |
|
2008 installment method sales |
— |
80,000 |
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:
|
Contract 1* |
Contract 2 |
Contract 3 |
|
|
Gross profit |
$800,000 |
$350,000 |
$600,000 |
|
% complete at the end of |
|||
|
2007 |
75% |
40% |
— |
|
2008 |
100% |
70% |
35% |
|
2009 |
100% |
80% |
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, and 2009.