ACCOUNTING

5—Warranty arrangement.

On December 31, 2017, Dieker Company sells equipment to Tabor Inc. for $125,000. Dieker includes a 1-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2017. Dieker estimates the prices to be $122,000 for the equipment and $3,000 for the cost of the warranty.

 

Instructions

(a)   Prepare the journal entry to record this transaction on December 31, 2017.

(b)   Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker sold an extended warranty (service type warranty) for an additional 2 years (2019–2020) for $2,000.

 

6—Percentage-of-completion and completed-contract methods.

On February 1, 2017, Marsh Contractors agreed to construct a building at a contract price of $17,400,000. Marsh estimated total construction costs would be $12,000,000 and the project would be finished in 2019. Information relating to the costs and billings for this contract is as follows:

2017                      2018                     2019

Total costs incurred to date                            $4,500,000            $7,920,000          $13,800,000

Estimated costs to complete                            7,500,000              5,280,000                     -0-

Customer billings to date                                  6,600,000            12,000,000            16,800,000

Collections to date                                            6,000,000            10,500,000            16,500,000

Instructions

Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2017, 2018, and 2019.

Percentage-of-Completion                               Completed-Contract

Gross Profit                                                 Gross Profit

2017               ___________                            2017             ___________

 

2018               ___________                            2018             ___________

 

2019               ___________                            2019             ___________

 

 

7—Franchises.

Pasta Inn charges an initial fee of $2,400,000 for a franchise, with $480,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,521,000. The franchisee has the right to purchase $90,000 of kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.

 

Instructions

Prepare the entry to record the initial franchise fee. Show supporting computations in good form.

 

 

 

8—Future value of annuity.  (Tables needed.)

Linda Ogleby wants to accumulate $40,000 to use for an around the world trip. She plans to accumulate the desired amount by depositing $5,500 annual-year-end payments into an account at the National Bank which pays 4% interest, compounded annually.

 

1.   Compute the account balance at the end of the sixth year.

2.   Compute the amount of each payment that Linda must make at the end of each of the six years to accumulate the $40,000.

 

 

 

 

9-—Entries for bad debt expense.

A trial balance before adjustment included the following:

Debit             Credit

Accounts receivable                                                $140,000

Allowance for doubtful accounts                                                               730

Sales                                                                                                $610,000

Sales returns and allowances                                       8,000

 

Give journal entries assuming that the estimate of uncollectible accounts is determined by taking (1) 5% of gross accounts receivable and (2) 3% of gross accounts receivable and assume a $730 debit allowance account balance.

 

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