Assignment
It is January, 2017 and you have just been hired as the financial reporting guru for TECHNOGYM, a diversified exercise/fitness corporation that has just finished a very fast-paced, dynamic year. TECHNOGYM began as the sole distributor of TechTone, a full-body fitness machine sold to fitness centers and hospitals. This remains the main operation of TECHNOGYM's business.
Your predecessor left the firm in a hurry. Your primary responsibility is to finish the 2016 year-end financial statements. Luckily, there is still time to make any necessary correcting and/or adjusting journal entries for the 2016 fiscal year. To give you a better understanding of the decisions made by your predecessor, at time you will be asked to reproduce results from 2015.
Throughout the semester you will work on different aspects of the company's financial records. This exercise relates to revenue recognition. Future exercises will relate to: accounts receivable, and inventory. Near the end of the semester, you will combine these exercises in a comprehensive financial reporting and analysis exercise.
General Information
TECHNOGYM uses a Jan. 1 - Dec. 31 financial year
TECHNOGYM's effective income tax rate and the number of shares of common stock outstanding are shown below each trial balance
You should assume that "Revenue From Other Products" and "Cost of Other Products" should be included with TechTone as primary operations
You should assume that all "Depreciation Expense" and "General and Admin Expenses" are considered operating expenses
Exercise for Revenue Recognition of a Long-Term Contract:
TECHNOGYM has a division that builds university fitness centers. At the end of 2016, there was one building project in process, the $45,000,000 Western Sky University project (WSU), which was started in June 2015. This project satisfied one of the requirements to recognize revenue over a period of time using the cost-to-cost method to determine percentage of completion. The original estimated costs for the WSU project totaled $41,750,000 but there were substantial increases in the cost of materials during 2015 that resulted in a higher estimate being used to prepare the adjusting entry at the end of 2015 (labeled "2015 AJE" in the T-account below).
Throughout 2016, routine transaction entries were to record construction costs, billings, and collections; these are reflected in the T-accounts below. During 2016 there were substantial additional cost increases, resulting in a 2016 year-end total cost estimate of $45,500,000 for the job. The contract does not allow for renegotiation of the contracted price. TECHNOGYM has a legally binding enforceable contract with the university and all parties are expected to be able to perform under the contracts. The general ledger accounts show the following activity before any 2016 year-end adjusting entries:
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Construction in Process
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Billings on Contracts
|
|
2015
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$16,700,000
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$20,000,000
|
2015
|
|
2015 AJE
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900,000
|
|
|
|
2016 WSU
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15,000,000
|
12,000,000
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2016 WSU
|
|
Unadj.
|
$32,600,000
|
$32,000,000
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Unadj.
|
Requirement 1: What was the amount of the revised estimated total project construction costs at the end of 2015? Show your calculations! You have enough information to find out the amount.