7.On August 15, 2007, Michael’s Construction Company was notified that it was the low bidder on a new headquarters building of a large bank. The bid price was $6,000,000 and the firm estimated that its cost to complete the project would be $4,500,000. Any cost overruns must be absorbed by the bidder. As of December 31, 2007, the company has incurred $1,500,000 in costs toward the project. The firm recognizes revenue in proportion to the amount of the contract that has been completed.
Required:
Determine the amount of profit that should be recognized to date under each of the following situations.
a.The firm estimates that it will cost another $3 million dollars to complete the contract.
b.The firm estimates that it will cost another $3.6 million dollars to complete the contract.
c.If the company had the option to wait until the end of the project to record its revenue, explain how your answers to parts (a) and (b).
8.Mardell’s General Store recorded sales totaling $3,600,000 during 2007. Even though the company carefully screens the customers to whom it sells on credit, there are always some customers who will not pay or cannot pay.
Required:
Show how the following events will be entered into the accounting system.
a. At year-end, it is estimated that 4% of sales will ultimately become uncollectible.
b. The company has learned that Marlene Walker has passed away, heavily in debt, and leaving no assets. Her account receivable balance of $4,700 is deemed worthless.
Account ASSETS = LIABILITIES + OWNERS’ EQUITY
9.On May 7, 2007, Dolly Company purchased inventory costing $280,000 on 30-day credit. The seller offered a 3% discount if the bill was paid within 10 days. It is Dolly’s policy to take all such discounts. On May 14, one-fourth of the previously acquired goods were sold to customers at a price of $100,000. One-half of these goods sold were sold for cash with the balance on account. No discounts were offered.
Required:
Show how these two transactions would be recorded in the accounting system. Dolly records all transactions net of any discount offered.
Account ASSETS = LIABILITIES + OWNER’S EQUITY