1.American Company Inc. is a company with three divisions namely American Construction, American Publishing and American Securities Divisions. Below is information about each division as of October 31, 2013 when the accounting year ended.
American Construction Division
This division has $30,000,000 construction project which was granted in May 2013. The company began construction of the project on July 1, 2013. Estimated costs of completion at the contract date were $25,000,000 over a 2-year time period from contract date. As of fiscal year end, construction costs of $7,200,000 had been incurred and progress billings of $9,500,000 had been made. On October 31, 2013, the construction costs to complete the project were estimated to be $16,800,000 because of an expected decline in raw materials costs. The division utilizes percentage-of-completion method to recognize revenue.
American Publishing Division
This division sells large volumes of novels to book distributors who will then sell to bookstores.
The distributors are allowed to return up to 30% of sales but over the past several years, the average is 20% return. In 2013, the division has sold books worth $7,000,000 to distributors. On October 31, 2013, $1,500,000 worth of books can still be returned while the remaining $5,500,000 had actual return rate of 21%. The division recognizes revenue when sales occur but take into consideration right of return.
American Securities Division
This division serves as an agent for home and business security systems. Customers are billed directly for the systems plus actual shipping costs. The company received orders for $6,000,000 of goods during the fiscal year 2013. $5,200,000 of goods were billed and shipped and payments of $600,000 were received. Actual shipping costs of $100,000 were also billed. The division pays commissions of 10% on productprice to manufacturing agents after goods are shipped to customers. The division uses revenue recognition at point of sale.
Required
For each division, calculate the revenue to be recognized for fiscal year ended October 31, 2013.
2.Chase Construction Company (CCC) entered into a contract to build a parking complex. The project will commence on January 1, 2014. The complex will cost approximately $600,000 and will take 3 years to complete construction. CCC will bill its client $900,000 for the construction.
The following information contain data for the construction
Description201420152016
Costs to date$270,000$450,000$610,000
Estimated costs to complete330,000150,0000
Progress billings to date270,000550,000900,000
Cash collected to date240,000500,000900,000
Required
a.Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year (2014, 2015, and 2016) of the construction.
b.Prepare all necessary journal entries for each year of the construction.
3.Schneider Company uses installment sales method. Below is a summary of its sales, cost of goods sold, and gross profit for three years.
Description201320142015
Installment sales$250,000$260,000$280,000
Cost of goods sold155,000163,800182,000
Gross profit95,00096,20098,000
Schneider Company's collections from customers are duplicated below:
Description201320142015
2013 installment sales $75,000 $100,000 $50,000
2014 installment sales100,000 120,000
2014 installment sales100,000
Required
Assume Schneider uses installment sales method of accounting
a.Compute the gross profit for 2013, 2014, and 2015.
b.Prepare journal entries for 2015.
individual project
BUYU Manufacturing has beencontracted to provide SAEL Electronics with printed circuit and motherboards (PC) boards under the following terms:
- 100,000 PC boards will be delivered to SAEL in one month.
- In3 months, SAEL has an option to take the delivery of an additional 100,000 boards by giving BUYUa 30-day notice.
- SAEL will pay $5 for each board it takes.
BUYU manufactures the PC boards through a process called batching, and manufacturing costs are as follows:
- The manufacturing batch run has a fixed setup cost of $250,000, regardless of the run size.
- The marginal manufacturing cost is $2.00 per board, regardless of the size of the batch run.
BUYU must decide whetherit should manufacture all 200,000 PC boards now, or ifit should manufacture 100,000 now and the other 100,000 boards only if SAEL decides to buy them. If BUYU manufactures 200,000 now and SAEL does not exercise its option, then BUYU will lose the manufacturing cost of the extra 100,000 boards. BUYU believes that there is a 50% chance thatSAEL will exercise its option to buy the additional 100,000 PC boards.
- Discuss the potential profit of manufacturing all 200,000 boards now.
- Draw a decision tree for the decision that BUYU faces.
- If BUYU uses its expected profit as the basis for its decision, determine the preferred course of action.
- Determine the range of values of the probability that SAEL will exercise its option, making the decision found in part c as optimal, and determine the expected value of perfect information about whether SAEL will exercise its option.
- Assume now that BUYU is constantly risk averse with a risk tolerance of $100,000, and answer parts 3 and 4 again.