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The French energy company, Areva Group, recently won a $2 billion contract to build a uranium enrichment plant. Areva began construction in 2013 and expects to complete it by 2019. Assume that the customer agrees to pay as follows: at the time of signing on December 20, 2012,$20 million; on December 31, 2013–2018, $100 million; and at completion on December 31, 2019,$1,380 million. Assume further that Areva incurs the following costs in constructing the generator: 2013, $340 million; 2014–2018,$238 million per year; and 2019, $170 million. Areva uses a Construction in Process account to accumulate costs. Although the costs involve a mixture of cash payments, credits to assets, and credits to liability accounts, assume for purposes of this problem that all costs are paid in cash.
a. Calculate the amount of revenue, expense, and income before income taxes that Areva Group will report for years 2013–2019 under each of the following revenue recognition methods: (1) Percentage-of-completion method. (2) Completed contract method.
b. Show the journal entries that Areva Group will make for this contract in 2012, 2013, 2014–2018, and 2019 for each of the revenue recognition methods examined in part a.
Sammie's Pizza sells an average of 150 pizzas per week, of which 20% are single-topping pizzas and 80% are supreme pizzas with multiple toppings. Singles sell for $8 each and incur variable costs of$2. Supremes sell for $12 each and incur variable costs of$6. The contribution margin per unit and total contribution margin for Singles and Supremes are
What does an unqualified auditor’s report indicate?
- a. The financial statements unfairly and inaccurately present the company’s financial position for the accounting period.
- b. The financial statements present fairly the financial position, the results of operations, and the changes in cash flows for the company.
- c. There are certain factors that might impair the firm’s ability to continue as a going concern.
- d. Certain managers within the firm are unqualified and, as such, are not fairly or adequately representing the interests of the shareholders.
Walker Company has just completed a physical inventory count at year-end, December 31, 2011. Only the items on the shelves, in storage, and in the receiving area were counted and costed on a FIFO basis. The inventory amounted to $65,000. During the audit, the independent CPA developed the following additional information:
a. Goods costing$750 were being used by a customer on a trial basis and were excluded from the inventory count at December 31, 2011.
b. Goods in transit on December 31, 2011, from a supplier, with terms FOB destination (explained in the “Required” section), cost $900. Because these goods had not yet arrived, they were excluded from the physical inventory count.
c. On December 31, 2011, goods in transit to customers, with terms FOB shipping point, amounted to$1,700 (expected delivery date January 10, 2012). Because the goods had been shipped, they were excluded from the physical inventory count.
d. On December 28, 2011, a customer purchased goods for cash amounting to $2,650 and left them “for pickup on January 3, 2012.” Walker Company had paid$1,590 for the goods and, because they were on hand, included the latter amount in the physical inventory count.
e. On the date of the inventory count, the company received notice from a supplier that goods ordered earlier at a cost of $3,550 had been delivered to the transportation company on December 27, 2011; the terms were FOB shipping point. Because the shipment had not arrived by December 31, 2011, it was excluded from the physical inventory count.
f. On December 31, 2011, the company shipped$850 worth of goods to a customer, FOB destination. The goods are expected to arrive at their destination no earlier than January 8, 2012. Because the goods were not on hand, they were not included in the physical inventory count.
g. One of the items sold by the company has such a low volume that management planned to drop it last year. To induce Walker Company to continue carrying the item, the manufacturer-supplier provided the item on a “consignment basis.” This means that the manufacturer-supplier retains ownership of the item, and Walker Company (the consignee) has no responsibility to pay for the items until they are sold to a customer. Each month, Walker Company sends a report to the manufacturer on the number sold and remits cash for the cost. At the end of December 2011, Walker Company had six of these items on hand; therefore, they were included in the physical inventory count at $950 each.
Assume that Walker’s accounting policy requires including in inventory all goods for which it has title. Note that the point where title (ownership) changes hands is determined by the shipping terms in the sales contract. When goods are shipped “FOB shipping point,” title changes hands at shipment and the buyer normally pays for shipping. When they are shipped “FOB destination,” title changes hands on delivery, and the seller normally pays for shipping. Begin with the$65,000 inventory amount and compute the correct amount for the ending inventory. Explain the basis for your treatment of each of the preceding items. ( Hint: Set up three columns: Item, Amount, and Explanation.)