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COMPREHENSIVE EXAMINATION E

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COMPREHENSIVE EXAMINATION E

Problem E-I — Long-Term Contracts.

Edwards Company contracted on 4/1/12 to construct a building for $2,300,000. The project was completed in 2014. Additional data follow:

 

                                                                                         2012                  2013                 2014     

            Costs incurred to date                                     $   560,000        $1,350,000        $1,900,000

            Estimated cost to complete                              1,040,000             450,000                —

            Billings to date                                                      500,000          1,800,000          2,300,000

            Collections to date                                               400,000          1,300,000          2,200,000

 

Instructions

(a)    Calculate the income recognized by Edwards under the percentage-of-completion method of accounting in each of the years 2012, 2013, and 2014.

(b)    Prepare all necessary entries for the year 2013.

(c)    Present the balance sheet disclosures at December 31, 2013. Proper headings or subheadings must be indicated.

 

 

 

Problem E-II — Installment Sales Method.

Garber, Inc. accounts for all sales of its merchandise on the installment basis. Following is the unadjusted trial balance at 12/31/14:

 

         Cash                                                                                       $   89,200

         Installment Accounts Receivable—2012                                 170,000

         Installment Accounts Receivable—2013                                 400,000

         Installment Accounts Receivable—2014                                 750,000

         Inventory, 1/1/14                                                                         78,000

         Repossessed Merchandise                                                        22,000

         Accounts Payable                                                                                                 $   136,000

         Deferred Gross Profit—2012                                                                                      84,000

         Deferred Gross Profit—2013                                                                                    175,000

         Common Stock                                                                                                         600,000

         Retained Earnings                                                                                                     406,200

         Installment Sales                                                                                                     1,000,000

         Purchases                                                                                 738,000

         Loss on Repossession                                                                  4,000

         Operating Expenses                                                                 150,000                                

                                                                                                      $2,401,200               $2,401,200

 

Additional Data:   2012 Gross Profit Rate = 32%; Inventory 12/31/14 = $159,000;                                                       Repossessed merchandise 12/31/14 = $14,000;

                             Merchandise sold in 2013 was repossessed in 2014 and the following                             entry was prepared (assume correctly):

                                    Deferred Gross Profit—2013.................................        14,000

                                    Repossessed Merchandise....................................        22,000

                                    Loss on Repossession ...........................................          4,000

                                                Installment Accounts Receivable—2013...                          40,000

 

Problem E-II  (cont.)

Instructions

(a)    Determine collections during 2014 on Installment A/R for each of the years 2012, 2013, and 2014.

(b)    Without prejudice to your answer in Part (a), assume that total collections on Installment Accounts Receivable during 2014 were $1,060,000; $220,000 from 2012, $300,000 from 2013, and $540,000 from 2014. Prepare all necessary adjusting and closing entries at 12/31/14.

 

 

 

Problem E-III — Deferred Income Taxes.

In 2013, the initial year of its existence, Dexter Company's accountant, in preparing both the income statement and the tax return, developed the following list of items causing differences between accounting and taxable income:

1.   The company sells its merchandise on an installment contract basis. In 2013, Dexter elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2013. These procedures created a $500,000 difference between book and taxable incomes. The future collection of the installment contracts receivables are expected to result in taxable amounts of $250,000 in each of the next two years. (Note: the company treats installment contracts receivable as a current asset on its balance sheet.)

2.   The company has also chosen to depreciate all of its depreciable assets on an accelerated basis for tax purposes but on a straight-line basis for accounting purposes. These procedures resulted in $60,000 excess depreciation for tax purposes over accounting depreciation. The temporary difference due to excess tax depreciation will reverse equally over the three year period from 2014-2016.

3.   Dexter leased some of its property to Baker Company on July 1, 2013. The lease was to expire on July 1, 2015 and the monthly rentals were to be $60,000. Baker, however, paid the first year's rent in advance and Dexter reported this entire amount on its tax return. These procedures resulted in a $360,000 difference between book and taxable incomes. (Note: this lease was an operating lease and Dexter classified the unearned rent as a current liability on its balance sheet.)

4.   Dexter owns $200,000 of bonds issued by the State of Oregon upon which 5% interest is paid annually. In 2013, Dexter showed $10,000 of income from the bonds on its income statement but did not show any of this amount on its tax return. (Note: these bonds are classified as long-term investments on Dexter's balance sheet.)

5.   In 2013, Dexter insured the lives of its chief executives. The premiums paid amounted to $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deducted on the tax return. The company is the beneficiary.

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COMPREHENSIVE EXAMINATION E Edwards Company contracted on 4/1/12 to construct a building for $2,300,000. The project was completed in 2014. Additional data follow: 2012 2013 2014 Costs incurred to date $ 560,000 $1,350,000 $1,900,000 Estimated cost to complete 1,040,000 450,000 — Billings to date 500,000 1,800,000 2,300,000 Collections to date 400,000 1,300,000 2,200,000 Instructions (a) Calculate the income recognized by Ed...
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