Solved by verified expert :ACCOUNTING 201
FINAL EXAM
SECTION I. A. Exchange of assets (12 points)
During the current year, Pellegrino Inc. trades a piece of
land used in its operations in Italy that has a book value (carrying value) of
$94,000 for a piece of processing equipment used in the operations of Perrier
Co. The carrying value of the machine on Perrier’s books is $75,000. The
transaction lacks commercial substance.
a) Assume the fair value of the land is $100,000. How much of
a gain or loss can Pellegrino recognize on the exchange? Your answer may be
zero.
b) Assume neither the fair value of the land nor the fair
value of the machine can be reliably measured. How much of a gain or loss can
Pellegrino recognize on the exchange? Your answer may be zero.
c) Assume that Pellegrino paysPerrier $10,000 as part
of the exchange of the land for the machine. Assume the fair value of the land
is $100,000. How much of a gain or loss can Pellegrino recognize on the
exchange? Your answer may be zero.
d) Assume that Pellegrino receives$4,000 from Perrier
as part of the exchange of the land for the machine. Assume the fair value of
the land is $100,000. How much of a gain or loss can Pellegrino recognize on
the exchange? Your answer may be zero.
SECTION I. B. Research and development costs (5 points)
Rosalynn Corp. incurred research and development costs in
2014 associated with the development of a new drug as follows:
Materials and equipment $140,000
Personnel 190,000
Indirect costs 100,000
$430,000
As of December 31, 2014, Rosalynn estimates that the
development process will result in a patentable drug by December 31, 2017 that
has an estimated fair value of $1,300,000. The materials and equipment
purchased have no alternative uses.
Q1. What amount is Rosalynn permitted to capitalize during
2014?
a) ZERO
b) 140,000
c) 290,000
d) 430,000
e) 1,300,000
Q2. Assume it is now December 31, 2017. The patent was
granted in December 2017 and the estimated fair value of the patent is
$1,800,000. What amount is Rosalynn permitted to capitalize as of December 31,
2017?
a) ZERO
b) 140,000
c) 290,000
d) 430,000
e) 1,800,000
SECTION I. C. Revenue recognition (8 points)
TVLAND is an experienced home theatre dealer. TVLAND also
offers a number of services such as installation and design/layout of the
seating after delivery of the TV. Assume that TVLAND sells big screen TVs on a
standalone basis. TVLAND also sells installation and seating design/layout
services, however, TVLAND does not offer design or installation to customers
who buy TVs from other vendors. Pricing for TVs is as follows.
TV only $ 800
TV with installation service 850
TV with design services 975
TV with design and installation services 1,000
In each instance in which design services are provided, the
design is separately priced within the arrangement at $175. Additionally, the
incremental amount charged by TVLAND for installation approximates the amount
charged by independent third parties. TVs are sold subject to a general right
of return. If a customer purchases a TV with installation and/or design
services, in the event TVLAND does not complete the service satisfactorily, the
customer is only entitled to a refund of the portion of the fee that exceeds
$800.
Question 1.Assume that a customer
purchases a TV with both design services and installation for $1,000. The
requested installation is completely customary and TVLAND has considerable
experience performing installation. Based on its experience, TVLAND is assured
that the installation will be performed satisfactorily to the customer. As
noted above, recall that the design services are priced separately.
TVLAND is allowed to recognize revenue related to the TV upon
delivery of the TV because:
(a) The TV has value to the customer on a standalone basis
(b) The arrangement includes a general right of return
relative to the TV
(c) Performance of the undelivered items (installation) is
considered probable and substantially in control of the seller
(d) All of the above are necessary to justify revenue
recognition
(e) None of the above justifies revenue recognition
SECTION I. C. Revenue recognition, continued
Question 2.Indicate the amount of
revenues that should be allocated to the TV, the installation, and the
design/layout services contract.
SECTION I. D. Revenue recognition on a long-term contract (11
points)
Ignore taxes throughout this problem.
On March 1, 2010, Green Construction Company contracted to
construct a factory building for Verde Manufacturing Inc. for a total contract
price of $10,000,000. The building was completed by October 31, 2012. Green
uses the percentage-of-completion method.
The annual contract costs incurred, estimated costs to
complete the contract, and accumulated billings to Verde for the year ended
December 31, 2010 are given below.
Contract costs incurred during the year $3,200,000
Estimated costs to complete the contract at 12/31 4,800,000
Billings to Verde during the year 3,500,000
Question 1.How much revenue should
Green recognize on this contract in 2010?
Question 2.How
much profit/(loss) should Green recognize on this contract in 2010? Be sure to
indicate whether it is a profit or a loss.
Question 3.During 2011, Green
incurs $2,800,000 of contract costs (i.e., cumulative total costs as of
December 31, 2011 = $6,000,000) and estimates that the costs to complete are
$3,000,000 as of 12/31/2011. How much profit/(loss) should Green recognize in
2011? Be sure to indicate whether it is a profit or a loss. You may round
answer to nearest thousand.
SECTION I. E. Investments (22 points)
Part 1. Pinks Fabric Co. (15 points)
There are four questions in this section related to an
investment by Pinks Fabric Co. (Pinks). Excerpts from Pinks’ footnotes in the 2014
annual report follow:
The fabric sourcing business is being conducted by Gulabi
Trading Co., an investee that is accounted for by the equity method of
accounting (see Note C).
Effective as of April 19, 2005, Pinks entered into an
agreement (the “Operating Agreement”) with two individuals (the “Principals”)
for the formation of Gulabi Trading Co. Pursuant to the terms of the Operating
Agreement, Pinks and each of the Principals made an initial capital
contribution of $500,000 in exchange for a 33.33% initial interest in Gulabi.
The Operating Agreement provides that profit be shared 66.66% by the Principals
and 33.33% by Financial.
