5.9: Exercises

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5.1 PhreeWire Phones offers a number of plans to its mobile telephone customers. For example, a customer can receive a free phone when signing a 3-year contract for airtime and data that requires a monthly payment of $80. Alternately, the customer could pay $300 for the telephone when signing a 2-year contract requiring monthly payments of $100.

Required: Determine the amount of revenue to be recognized each year under the two different scenarios. Assume that the fair value of the telephone is $500 and the fair value of the airtime and data is $600 per year.

5.2 Refer to the previous question.

Required: Determine the amount of revenue to be recognized each year under the two different scenarios. Assume that the fair value of the telephone is indeterminable and the fair value of the airtime and data is as indicated.

5.3 Art Attack Ltd. ships merchandise on consignment to The Print Haus, a retailer of fine art prints. The cost of the merchandise is $58,000, and Art Attack pays the freight cost of $2,200 to ship the goods to the retailer. At the end of the accounting period, The Print Haus notifies Art Attack Ltd. that 80% of the merchandise has been sold for $79,000. The Print Haus retains a 10% commission as well as $3,400, which represent advertising costs it paid, and remits the balance owing to Art Attack Ltd.

Required: Complete the journal entries required by each company for the above transactions.

5.4 Eames Fine Furniture sells high quality, roll-top desks. The company allows customers to return products for a full refund within 90 days of purchase. The desks sell for $3,000 and cost the company $2,000 to manufacture. The company expects that any returned desks can be resold for a profit. The company has reviewed historical financial data and determined that 0.5% of all desks sold are returned for a refund. During the month of January, the company sold 800 desks.

Required:

Prepare all the required journal entries to record the January sales.
Assume one desk was actually returned by the end of January. Prepare the journal entry required to record the return and describe the appropriate accounting treatment of any further returns.

5.5 Frank Ledger, a non-designated accountant, has agreed to provide twelve months of bookkeeping services to Digital Dreams Inc. (DDI), a computer equipment and accessories retailer. Mr. Ledger will compile the accounting records of DDI every month and provide an unaudited financial statement. Mr. Ledger has agreed not to invoice DDI during the year, and DDI has agreed to provide Mr. Ledger with a free computer system. The computer would normally sell for $3,000. Mr. Ledger has indicated that he would typically charge approximately $250/month for similar bookkeeping services, although the actual amount invoiced per month would depend on the volume of transactions and a number of other factors.

Required: Assume the contract described above is signed on October 1 and Mr. Ledger's fiscal year end is December 31. Prepare all the required journal entries for Mr. Ledger between these two dates.

5.6 Suarez Ltd. entered into a contract on January 1, 2020, to construct a small soccer stadium for a local team. The total fixed price for the contract is $35 million. The job was completed in December 2021. Details of the project are as follows:

	2020	2021
Costs incurred in the period	$20,000,000	$11,000,000
Estimated costs to complete the project	10,000,000	-
Customer billings in the period	18,000,000	17,000,000
Cash collected in the period	17,000,000	15,000,000

Required:

Calculate the amount of gross profit to be recognized each year using the percentage-of-completion method.
Prepare all the required journal entries for both years.

5.7 In 2021, Gerrard Enterprises Inc. was contracted to build an apartment building for $5.2 million. The project was expected to take three years and Gerrard estimated the costs to be $4.3 million. Actual results from the project are as follows:

	2021	2022	2023
Accumulated costs to date	$1,100,000	$3,400,000	$4,500,000
Estimated costs to complete the project	3,200,000	1,000,000	-
Customer billings to date	1,500,000	3,300,000	5,200,000
Cash collected to date	1,000,000	3,000,000	5,200,000

Required:

Calculate the amount of gross profit to be recognized each year using the percentage-of-completion method.
Show how the details of this contract would be disclosed on the balance sheet and income statement in 2022.

5.8 On February 1, 2020, Sterling Structures Ltd. signed a $3.5 million contract to construct an office and warehouse for a small wholesale company. The project was originally expected to be completed in two years, but difficulties in hiring a sufficient pool of skilled workers extended the completion date by an extra year. As well, significant increases in the price of steel in the second year resulted in cost overruns on the project. Sterling was able to negotiate a partial recovery of these costs, and the total contract value was adjusted to $3.8 million in the second year. Additional information from the project is as follows:

	2020	2021	2022
Total contract value	$3,500,000	$3,800,000	$3,800,000
Accumulated costs to date	800,000	2,400,000	3,900,000
Estimated costs to complete the project	2,100,000	1,600,000	-
Customer billings to date	1,000,000	2,100,000	3,800,000
Cash collected to date	1,000,000	2,000,000	3,800,000

Required:

Calculate the amount of gross profit to be recognized each year using the percentage-of-completion method.
Prepare all the required journal entries for 2021.

5.9 Take the same set of facts as described in the previous question, except assume that there is no reasonable way to estimate progress on the contract.

Required:

Using the zero-margin method (IFRS), determine the amount of revenue and expense to report each year.
Using the completed-contract method (ASPE), determine the amount of revenue and expense to report each year.

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