Question 2
Pankratov Lakes is a new recreational real estate development that consist of 500 Lake front and lake view lots. As a special incentive to the first 100 buyers of lake view lots, the developer is offering 3 years of free financing on 10 year, 12% notes, no down payment and one week at a nearby established resort – “a $1200 value”. The normal price per lot is $12,000. The cost per lake view lot to the developer is an estimated average of $2000. The development costs continue to be incurred, the actual average cost per lot is not known at this time. The resort promotion costs is $700 per lot. The notes are held by Davis Corp. a wholly-owned subsidiary of Pankratov.
1. Discuss the revenue recognition and gross profit measurement issues raised by this situation?
2. How would the developer’s past financial and business experience influence your decision concerning the recording of these transactions?
3. Assume 50 persons have accepted the offer, signed 10yr notes and have stayed at the local resort. Prepare the journal entries that you think are appropriate
4. What, if anything, should be disclosed in the notes to financial statements?
Question 3
Recently, John Brown Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points:
1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.
2. The basic factor of depreciation in this instance is wear and tear and because equipment was idle no wear and tear occurred
Please comment on the appropriateness of the controller’s comments.