Intermediate Accounting教科书上习题答案5（by J David Spiceland）.doc

Chapter 05 Income Measurement and Profitability Analysis 5 1 Chapter 5 Income Measurement and Profitability Analysis QUESTIONS FOR REVIEW OF KEY TOPICS Question 5 1 The realization principle requires that two criteria be satisfied before revenue can be recognized 1 The earnings process is judged to be complete or virtually complete 2 There is reasonable certainty as to the collectibility of the asset to be received usually cash Question 5 2 At the time production is completed there usually exists significant uncertainty as to the collectibility of the asset to be received We don t know if the product will be sold nor the selling price nor the buyer if eventually the product is sold Because of these uncertainties revenue recognition usually is delayed until the point of product delivery Question 5 3 If the installment sale creates a situation where there is significant uncertainty concerning cash collection and it is not possible to make an accurate assessment of future bad debts revenue and cost recognition should be delayed beyond the point of delivery Question 5 4 The installment sales method recognizes gross profit by applying the gross profit percentage on the sale to the amount of cash actually received each period The cost recovery method defers all gross profit recognition until cash has been received equal to the cost of the item sold Question 5 5 Deferred gross profit is a contra installment receivable account The balance in this account is subtracted from gross installment receivables to arrive at installment receivables net The net amount of the receivables represents the portion of remaining payments that represent cost recovery Chapter 05 Income Measurement and Profitability Analysis 5 2 Question 5 6 Because the return of merchandise can retroactively negate the benefits of having made a sale the seller must meet certain criteria before revenue is recognized in situations when the right of return exists The most critical of these criteria is that the seller must be able to make reliable estimates of future returns In certain situations these criteria are not satisfied at the point of delivery of the product Question 5 7 Sometimes a company arranges for another company to sell its product under consignment The consignor physically transfers the goods to the other company the consignee but the consignor retains legal title If the consignee can t find a buyer within an agreed upon time the consignee returns the goods to the consignor However if a buyer is found the consignee remits the selling price less commission and approved expenses to the consignor Because the consignor retains the risks and rewards of ownership of the product and title does not pass to the consignee the consignor does not record revenue and related costs until the consignee sells the goods and title passes to the eventual customer Question 5 8 For service revenue if there is one final service that is critical to the earnings process revenues and costs are deferred and recognized after this service has been performed On the other hand in many instances service revenue activities occur over extended periods and recognizing revenue at any single date within that period would be inappropriate Instead it s more meaningful to recognize revenue over time in proportion to the performance of the activity Question 5 9 The completed contract method of recognizing revenues and costs on long term construction contracts is equivalent to recognizing revenue at point of delivery i e when the construction project is complete The percentage of completion method assigns a fair share of the project s expected revenues and costs to each period in which the earnings process takes place i e the construction period The fair share typically is estimated as the project s costs incurred each period as a percentage of the project s total estimated costs The completed contract method should only be used when the lack of dependable estimates or inherent hazards cause forecasts of future costs to be doubtful Chapter 05 Income Measurement and Profitability Analysis 5 3 Question 5 10 The completed contract method recognizes revenue cost of construction and gross profit at the end of the contract after the contract has been completed The cost recovery method will recognize an amount of revenue equal to the amount of cost that can be recovered which typically is an amount that exactly offsets costs until all costs have been recovered and then will recognize the remaining revenue and gross profit Therefore revenue and cost are recognized earlier under the cost recovery method than under the completed contract method but gross profit recognition is delayed until late in the contract for both approaches Assuming that the final costs are incurred just prior to completion of the contract both approaches should recognize gross profit at the same time Question 5 11 The billings on construction contract account is a contra account to the construction in progress asset At the end of each reporting period the balances in these two accounts are compared If the net amount is a debit it is reported in the balance sheet as an asset Conversely if the net amount is a credit it is reported as a liability Question 5 12 An estimated loss on a long term contract must be fully recognized in the first period the loss is anticipated regardless of the revenue recognition method used Question 5 13 This guidance requires that if an arrangement includes multiple elements the revenue from the arrangement should be allocated to the various elements based on the relative fair values of the individual elements If part of an arrangement does not qualify for separate accounting revenue recognition is delayed until revenue is recognized for the other parts Question 5 14 IFRS has less specific guidance for recognizing revenue for multiple deliverable arrangements IAS No 18 simply states that in certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction and gives a couple of examples whereas U S GAAP provides more restrictive guidance concerning how to allocate revenue to various components and when revenue from components can be recognized Question 5 15 Specific guidelines for revenue recognition of the initial franchise fee are provided by FASB ASC 952 605 25 1 A key to these guidelines is the concept of substantial performance It requires that substantially all of the initial services of the franchisor required by the franchise agreement be performed before the initial franchise fee can be recognized as revenue The term substantial requires professional judgment on the part of the accountant In situations when the initial franchise fee is collectible in installments even after substantial performance has occurred the installment sales or cost recovery method should be used for profit recognition if a reasonable estimate of uncollectibility cannot be made Chapter 05 Income Measurement and Profitability Analysis 5 4 Question 5 16 Receivables turnover ratio Net sales Average accounts receivable net Inventory turnover ratio Cost of goods sold Average inventory Asset turnover ratio Net sales Average total assets Activity ratios are designed to provide information about a company s effectiveness in managing assets Activity or turnover of certain assets measures the frequency with which those assets are replaced The greater the number of times an asset turns over the less cash a company must devote to that asset and the more cash it can commit to other purposes Question 5 17 Profit margin on sales Net income Net sales Return on assets Net income Average total assets Return on shareholders Net income equity Average shareholders equity A fundamental element of an analyst s task is to develop an understanding of a firm s profitability Profitability ratios provide information about a company s ability to earn an adequate return relative to sales or resources devoted to operations Resources devoted to operations can be defined as total assets or only those assets provided by owners depending on the evaluation objective Chapter 05 Income Measurement and Profitability Analysis 5 5 Question 5 18 Return on equity Profit marginXAsset turnoverXEquity multiplier Net income Ave total equity Net income Total sales XTotal sales Ave total assets XAve total assets Ave total equity The DuPont framework shows return on equity as being driven by profit margin reflecting a company s ability to earn income from sales asset turnover reflecting a company s effectiveness in using assets to generate sales and the equity multiplier reflecting the extent to which a company has used debt to finance its assets Question 5 19 These perspectives are referred to as the discrete and integral part approaches Current interim reporting requirements and existing practice generally view interim reports as integral parts of annual statements However the discrete approach is applied to some items Most revenues and expenses are recognized in interim periods as incurred However if an expenditure clearly benefits more than just the period in which it is incurred the expense should be spread among the periods benefited Examples include annual repair expenses property tax expense and advertising expenses incurred in one quarter that clearly benefit later quarters These are assigned to each quarter through the use of accruals and deferrals On the other hand major events such as discontinued operations extraordinary items and unusual or infrequent items should be reported separately in the interim period in which they occur Chapter 05 Income Measurement and Profitability Analysis 5 6 BRIEF EXERCISES Brief Exercise 5 1 2011 gross profit 3 000 000 1 200 000 1 800 000 2012 gross profit 0 Brief Exercise 5 2 2011 Cost recovery Cost Sales 1 200 000 40 implying a gross profit 60 3 000 000 2011 gross profit 2011 cash collection of 150 000 x 60 90 000 2012 gross profit 2012 cash collection of 150 000 x 60 90 000 Brief Exercise 5 3 No gross profit will be recognized in either 2011 or 2012 Gross profit will not be recognized until the entire 1 200 000 cost of the land is recovered In this case it will take 8 payments to recover the cost of the land 1 200 000 150 000 8 so gross profit recognition will equal 100 of the cash collected beginning with the ninth installment payment Brief Exercise 5 4 Initial deferred gross profit 3 000 000 1 200 000 1 800 000 Less gross profit recognized in 2011 150 000 x 60 90 000 Less gross profit recognized in 2012 150 000 x 60 90 000 Deferred gross profit at the end of 2012 1 620 000 Chapter 05 Income Measurement and Profitability Analysis 5 7 Brief Exercise 5 5 The seller must meet certain criteria before revenue can be recognized in situations when the right of return exists The most critical of these criteria is that the seller must be able to make reliable estimates of future returns If Meyer s management can make reliable estimates of the furniture that will be returned revenue can be recognized when the product is delivered assuming the company has no additional obligations to the buyer If reliable estimates cannot be made because of significant uncertainty revenue and related cost recognition is delayed until the uncertainty is resolved Brief Exercise 5 6 Total estimated cost to complete 6 million 9 million 15 million of completion 6 million 15 million 40 Total estimated gross profit 20 million 15 million 5 000 000 multiplied by the of completion 40 Gross profit recognized the first year 2 000 000 First year revenue 20 000 000 x 40 8 000 000 Brief Exercise 5 7 Assets Accounts receivable 7 million 5 million 2 000 000 Cost plus profit 6 million 2 million in excess of billings 7 million 1 000 000 Total estimated gross profit 20 million 15 million 5 000 000 multiplied by the of completion 40 Gross profit recognized in the first year 2 000 000 Chapter 05 Income Measurement and Profitability Analysis 5 8 Brief Exercise 5 8 Year 1 0 Year 2 4 million Revenue 20 000 000 Less Costs in year 1 6 000 000 Costs in year 2 10 000 000 Actual profit 4 000 000 Brief Exercise 5 9 Year 1 Revenue 6 million Cost 6 million Gross profit 0 Year 2 Revenue 14 million 20 million total 6 million in year 1 Cost 10 million Gross profit 4 million Brief Exercise 5 10 The anticipated loss of 3 million 30 million contract price less total estimated costs of 33 million must be recognized in the first year applying either method Chapter 05 Income Measurement and Profitability Analysis 5 9 Brief Exercise 5 11 Orange has separate sales prices for the two parts of LearnIt Plus so that vendor specific objective evidence VSOE allows them to allocate revenue to those parts according to their relative selling prices LearnIt will be allocated 200 x 150 150 100 120 and that revenue will be recognized upon delivery of the LearnIt software LearnIt Office Hours will be allocated 200 x 100 150 100 80 and that revenue will be deferred and recognized over the life of the one year period in which the Office Hours are delivered If LearnIt were not sold separately Orange would not have VSOE for all of the parts of the contract In that case revenue would be delayed until the later part was delivered In this case the 200 would be deferred and recognized over the life of the one year period in which the Office Hours are delivered Brief Exercise 5 12 Orange has separate sales prices for the two parts of LearnIt Plus so the company can base its estimates of the fair value of those parts according to their relative selling prices LearnIt will be allocated 200 x 150 150 100 120 and that revenue will be recognized upon delivery of the LearnIt software LearnIt Office Hours will be allocated 200 x 100 150 100 80 and that revenue will be deferred and recognized over the life of the one year period in which the Office Hours are delivered If LearnIt were not sold separately the accounting would be the same Orange would estimate the fair value of LearnIt Office Hours to be 100 and allocate revenue in the same fashion as it did when that product was sold separately VSOE is not required under IFRS Brief Exercise 5 13 Specific conditions for revenue recognition of the initial franchise fee are provided by FASB ASC 952 605 25 1 A key to these conditions is the concept of substantial performance It requires that substantially all of the initial services of the franchisor required by the franchise agreement be performed before the initial franchise fee can be recognized as revenue The term substantial requires professional judgment on the part of the accountant Often substantial performance is considered to have occurred when the franchise opens for business Continuing franchise fees are recognized over time as the services are performed Chapter 05 Income Measurement and Profitability Analysis 5 10 Brief Exercise 5 14 600 000 200 000 Receivables turnover ratio Net sales Average accounts receivable net Receivables turnover ratio 600 000 100 000 120 000 2 5 45 times Inventory turnover ratio Cost of goods sold Average inventory Inventory turnover ratio 400 000 80 000 60 000 2 5 71 times Chapter 05 Income Measurement and Profitability Analysis 5 11 Brief Exercise 5 15 Profit margin Net income Sales 65 000 420 000 15 5 Return on assets Net income Average total assets 65 000 800 000 8 1 Return on shareholders equity Net income Average shareholders equity 65 000 522 500 12 4 Shareholders equity beginning of period 500 000 Add Net income65 000 Deduct Dividends 20 000 Shareholders equity end of period 545 000 Average shareholders equity 500 000 545 000 2 522 500 Chapter 05 Income Measurement and Profitability Analysis 5 12 Brief Exercise 5 16 Return on equity Profit margin XAsset turnoverX Equity multiplier Net income Ave total equity Net income Total sales XTotal sales Ave total assets XAve total assets Ave total equity Return on shareholders equity Net income Average shareholders equity 65 000 522 500 12 4 Profit margin Net income Sales 65 000 420 000 15 5 Asset Turnover Sales Average total assets 420 000 800 000 52 5 Chapter 05 Income Measurement and Profitability Analysis 5 13 Brief Exercise 5 16 concluded Equity Multiplier Average total assets Average shareholders equity 800 000 522 500 1 53 Check 12 4 ROE 15 5 profit margin x 52 5 asset turnover x 1 53 equity multiplier Brief Exercise 5 17 Inventory turnover ratio Cost of goods sold Average inventory 6 0 x 75 000 Cost of goods sold 75 000 x 6 0 450 000 Sales Cost of goods sold Gross profit 600 000 450 000 150 000 Chapter 05 Income Measurement and Profitability Analysis 5 14 Exercise 5 1 Requirement 1 Alpine West should recognize revenue over the ski season on an anticipated usage basis in this case equally throughout the season The fact that the 450 price is nonrefundable is not relevant to the revenue recognition decision Revenue should be recognized as it is earned in this case as the services are provided during the ski season Requirement 2 November 6 2011To record the cash collection Cash 450 Unearned revenue 450 December 31 2011To recognize revenue earned in December no revenue earned in November as season starts on December 1 Unearned revenue 450 x 1 5 90 Revenue 90 Requirement 3 90 is included in revenue in the 2011 income statement The 360 remaining balance in unearned revenue is included in the current liability section of the 2011 balance sheet EXERCISES Chapter 05 Income Measurement and Profitability Analysis 5 15 Exercise 5 2 Requirement 1 2011 Cost recovery 234 000 65 gross profit 35 360 000 2012 Cost recovery 245 000 70 gross profit 30 350 000 2011 gross profit Cash collection from 2011 sales of 150 000 x 35 52 500 2012 gross profit Cash collection from 2011 sales of 100 000 x 35 35 000 Cash collection from 2012 sales of 120 000 x 30 36 000 Total 2012 gross profit 71 000 Requirement 2 2011 deferred gross profit balance 2011 initial gross profit 360