1(Completed-Contract Method) Monat Construction Company, Inc., entered into a firm fixed price 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:
December 31, 2010 - Percent of Completion – 30% - Contract Costs Incurred - $1,140,000 - Est. Costs to Complete Contract - $2,660,000 - Billings to Hyatt Clinic – 1,400,000
December 31, 2011- Percent of Completion – 70% - Contract Costs Incurred – 3,290,000 - Est. Costs to Complete Contract – 1,410,000 - Billings to Hyatt Clinic – 2,500,000
December 31, 2014 – Percentage of Completion 100% - Contract Costs Incurred - $4,800,000 - Est. Costs to Complete Contract – 0 - Billings to Hyatt Clinic 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.
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.
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.
A major electronics firm has introduced a line of products that will compete directly with Ace’s pri***** *****ne, 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.
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.)