Project description

Problem 1:

The following information pertains to the XTK Company for the year 2013:

1.    During the year, the XTK Company sold its computer component division.  The transaction qualifies for treatment as a

discontinued operation.  As a result of the sale, the company suffered a $407,700 loss.

2.    The company held stock in a parts supplier to its computer component division in order for the company to exert some

influence over the supplier.  Since they disposed of the division they no longer felt the stock was a good investment and

sold the stock for a loss of $202,100.

3.    A tornado damaged a storage facility resulting in an uninsured loss of $283,600.  The facility was in an area not

generally subject to tornados and is, therefore, an extraordinary item.

4.    The company changed its method of recognizing revenue from construction contracts from the completed contract method

to the percentage-of-completion method.  Had the percentage-of-completion method been used in 2011 net income would have

increased $212,700 for that year.  Had the percentage-of-completion method been used in 2012 net income would have decreased

$70,900 for that year.  The percentage-of-completion method was used and properly recorded for 2013.

5.    On January 1, 2011 the company purchased new delivery trucks at a total cost of $191,400.  The estimated life of the

trucks was 5 years and the estimated salvage value at the end of their estimated life was $31,900.  When depreciation was

computed and recorded for 2011, 2012 and 2013 the company failed to deduct the salvage value from the cost to determine the

depreciation base.

6.    The company routinely carries life insurance policies on its officers.  As a result of the death of the company’s

CFO, the company received $390,000 from the insurance company.  The cash surrender value of the policy prior to the CFO’s

death was $163,100 and that value was carried on the financial statements as an investment.

7.    The company’s bookkeeper has prepared a tentative income statement for 2013 that shows income from continuing

operations before taxes of $2,800,600.  However, the bookkeeper does not know how to handle any of the above transactions,

with the exception of the construction contract percentage-of-completion method for 2013, and has not included them in the

tentative income statement.

8.    The company’s income tax rate is 30%.

9.    The company had 283,600 shares of common stock outstanding for the entire year of 2013.

10.    All of the transactions above are stated pre-tax.  Note that the proceeds of life insurance policies are not subject

to income tax.

11.    The company uses the straight-line method of depreciation for all depreciable assets.

12.    The company ends its accounting year on December 31.

Instructions:

Beginning with the line “Income from Continuing Operations before Taxes”, prepare an income statement for 2013 including the

proper presentation of earnings per share.

Problem 2:

The FRO Company is engaged in construction.  It entered into a contract with the CFK Company in July of 2011 to construct a

new factory for the CFK Company.

The following information was accumulated by the FRO Company as they progressed with construction and completed the project

in December of 2013:

To date
As of:    Costs incurred    Estimated costs to complete    Billings to CFK Company
12/31/11    $1,170,000    $10,530,000    $2,340,000
12/31/12    9,375,000    6,250,000    8,590,000
12/31/13    16,400,000    0    14,450,000

The agreed upon contract price for the construction of the factory was $15,230,000.

The FRO Company ends its accounting year on December 31.

Instructions:

Prepare schedules in good form that compute the profit or loss to be recognized by the FRO Company for each of the three

years of the project:

1.    Using the percentage-of-completion method.
2.    Using the completed-contract method.

Problem 3: SHONESSI

The DPJ Company manufactures and sells custom made machinery for assembly lines.  The company began operations in February of

2015.  Because of the nature of its business and the manner in which customers are accustom to paying, the company uses the

installment-sales method of recognizing profit for all of its sales.

The following information is from the company’s results for 2015 and 2016:

Sales    Profit as a percentage of costs    Cash collections of 2015 sales    Cash collections of  2016 sales
In year 2015    $484,000    24.00%    $141,000    $0
In year 2016    625,000    28.00%    242,000    181,000

The company ends its accounting year on December 31.

Instructions:

1.    Using the installment-sales method, compute the amount of realized gross profit to be recognized on the 2016 income

statement.

2.    State the three possible acceptable methods of reporting the deferred gross profit on the balance sheet for 2016.

3.    Using the cost-recovery method, compute the amount of realized gross profit to be recognized on the 2015 and the 2016

income statements.