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Experience:  BS Accounting
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1(Completed-Contract Method) Monat Construction Company, Inc.,

Resolved Question:

1(Completed-Contract Method) Monat Construction Company, Inc., entered into a firm fixedprice
contract with Hyatt Clinic on July 1, 2010, to construct a four-story office building. At that time,
Monat estimated that it would take between 2 and 3 years to complete the project. The total contract price
for construction of the building is $4,400,000. Monat appropriately accounts for this contract under the
completed-contract method in its financial statements and for income tax reporting. The building was
deemed substantially completed on December 31, 2012. Estimated percentage of completion, accumulated
contract costs incurred, estimated costs to complete the contract, and accumulated billings to the Hyatt
Clinic under the contract are shown below.
At At At
December December December
31, 2010 31, 2011 31, 2012
Percentage of completion 30% 70% 100%
Contract costs incurred $1,140,000 $3,290,000 $4,800,000
Estimated costs to complete the contract $2,660,000 $1,410,000 –0–
Billings to Hyatt Clinic $1,400,000 $2,500,000 $4,300,000
(a) Prepare schedules to compute the amount to be shown as “Cost of uncompleted contract in excess
of related billings” or “Billings on uncompleted contract in excess of related costs” at December
31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
(b) Prepare schedules to compute the profit or loss to be recognized as a result of this contract for the
years ended December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations
in good form.

2(Disclosures Required in Various Situations) Ace Inc. produces electronic components for
sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination
of Ace’s financial statements for the year ended December 31, 2011, Gloria Rodd, CPA, completed
field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing
her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements
or notes.
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments
may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained
earnings at the date of the loan agreement was $420,000. From that date through December 31,
2011, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis
of these data, the staff auditor assigned to this review concluded that there was no retained earnings
restriction at December 31, 2011.
Item 2
Recently Ace interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were
paid regularly through 2010, discontinued for all of 2011 to finance purchase of equipment for the company’s
new plant, and resumed in the first quarter of 2012. In the annual report dividend policy is to be
discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Ace’s primary
line, now being produced in the specially designed new plant. Because of manufacturing innovations, the
competitor’s line will be of comparable quality but priced 50% below Ace’s line. The competitor announced
its new line during the week following completion of field work. Ms. Rodd read the announcement in
the newspaper and discussed the situation by telephone with Ace executives. Ace will meet the lower
prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery
of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of
25 years, is leased from Wichita National Bank at an annual rental of $600,000. The company is obligated
to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease,
the company has the option of purchasing the property for $1. In Ace’s income statement, the rental payment
is reported on a separate line.
For each of the items on page 1371, discuss any additional disclosures in the financial statements and
notes that the auditor should recommend to her client. (The cumulative effect of the four items should
not be considered.)
Submitted: 2 years ago.
Category: Homework
Expert:  Neo replied 2 years ago.

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Neo, Tutor
Category: Homework
Satisfied Customers: 12044
Experience: BS Accounting
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