Response to the following problem:
Outback Industries manufactures power-distribution equipment, builds power plants, and develops real estate. While the company recognizes the majority of its revenues at point of sale, Outback appropriately recognizes revenue on long-term construction projects using the percentage-of-completion method. It recognizes sales of some properties using the installment-sales approach. Income data for 2014 from operations other than construction and real estate are as follows.
Revenues $6,500,000
Expenses 4,350,000
Other information:
1. Outback started a construction project during 2013. The total contract price is $1,000,000, and $100,000 in costs were incurred in 2014. Estimated costs to complete the project in 2015 are $400,000. In 2013, Outback incurred $200,000 of costs and recognized $50,000 gross profit on this project.
2. During this year, Outback sold real estate parcels at a price of $400,000. It recognizes gross profit at a 35% rate when cash is received. Outback collected $200,000 during the year on these sales.
3. The reported revenues include an order for power relays valued at $150,000. At year-end, this new customer is not ready to take delivery. Outback billed the customer and moved the relays to an Outback warehouse close to the customer for quick delivery when needed
Instructions
(a) Determine net income for Outback Industries for 2014. (Ignore taxes.)
(b) Some year-end audit work discovered that in 2014 Outback made installment sales in the amount of $80,000 (cost of sales $52,000) to customers with very questionable credit backgrounds. The company accounted for these sales using the cost-recovery method. Outback collected $20,000 from these customers in 2014. Determine the effect of this change in accounting on the income computed in part (a).