90.2K

Verified Solution

Link Copied!

I. Revenue Recognition Scenarios

Each of the following independent situations relates to the recognition of revenue:

1. Morning Donut agrees to supply donuts and coffee on a weekly basis to a local business. The contract starts on January 1 and runs for 1 year and requires semiannual payments at the beginning of each 6 month period. Morning Donut charges $1,600 per month for the donuts and coffee. The local business pays Morning Donut $9,600 on January 1 and July 1.
2. Flying High Airline sells an airline ticket to a customer for $500 on April 9. Flying High collects the fare at the time the reservation is made. The customer completes the flight in July.
3. Parcel Freight Company ships a package for a customer under its express same-day shipping option for $100. The package is shipped and delivered on September 5. Parcel Freight bills the customer on September 15 and collects the cash from the customer on October 10.
4. Builds-A-Lot constructs a spec home in a subdivision from April though June (3 month construction period). The construction cost of the hourse is $200,000. Builds-A-Lot reaches an agreement to sell the house for $240,000 on August 20. The sell is completed and is closed on October 5.
5. The Raleigh Knights sell four season tickets to a customer on July 1. The customer pays the entire amount at the time of purchase (July 1). The Knights play 10 regular season games thoughout the Fall and the cost of one season ticket is $250.

Required: For each situation, indicate when and how much revenue a company should recognize revenue.

II. Preparing an Aging Schedule

East Bay Inc. uses the aging method to estimate the company's bad debt expense. Mark Evans, the president of the company, collected the following information about the company's outstanding accounts receivable and their probability of collection at the end of its first year of operations:

Account Age	Amount	Probability of Non-Collection
0-30 days	$600,000	0.75%
31-60 days	$300,000	2.00%
61-90 days	$150,000	3.00%
91-120 days	$ 90,000	5.00%
Over 120 days	$ 50,000	30.00%

Required:

(a) Calculate bad debt expense, the allowance for doubtful accounts, and the total balance reflected on the balance sheet for accounts receivable.

(b) Assume that East Bay adopts a policy of writing off as worthless all unpaid accounts receivable over 120 days old. How will implementation of this policy impact the net realizable value of the company's accounts receivable?

Part III: FIFO and LIFO

The Brattle Corporation began operations on January 1. Information related to the company's purchases of inventory and sales of products during the year are presented below.

January 1	Purchase	220 units @ $12 per unit
April 1	Sold	120 units @ $25 per unit
July 1	Purchase	100 units @ $15 per unit
September	Sold	130 units @ $25 per unit

Required:

(a) Calculate the FIFO cost of goods sold and ending inventory. Use the perpetual method we illustrated in class.

(b) Calculate the LIFO cost of goods sold and ending inventory. Use the perpetual method we illustrated in class.

(c). What explains the difference (if any) between the two methods?

Part IV: LIFO to FIFO Change

At year-end, Utica Corporation announced it would change its inventory valuation method from LIFO to FIFO. Assume that the difference between LIFO and FIFO is $8.4 million and purchase prices had historically been rising.

Required: Describe the financial effects of this policy change on the balance sheet, the income statement and the statement of cash flows. (Ignore any tax effects).

Answer & Explanation Solved by verified expert

See Answer