Deere & Company manufactures agricultural and industrial equipment and provides financing services for its independent dealers and their retail customers. Exhibit 7.15 presents an income statement and Exhibit 7.16 presents a balance sheet for Deere for Year 3 and Year 4. The notes to these financial statements follow:
Note 1: Deere recognizes income from equipment sales for financial reporting at the time of shipment to dealers. Provisions for sales incentives to dealers, returns and allowances, and uncollectible accounts are made at the time of sale. There is a time lag, which varies based on the timing and level of retail demand, between when Deere records sales to dealers and when dealers sell equipment to retail customers. Deere recognizes income from equipment sales using the installment method for tax reporting.
Note 2: Deere provides financing to independent dealers and retail customers for Deere products. Accounts and notes receivable appear net of unearned finance income. Deere recognizes the unearned finance income as finance revenue over the period that dealer and customer notes are outstanding.
Note 3: Deere uses a LIFO cost flow assumption for inventories and cost of goods sold. The excess of FIFO over LIFO cost of inventories was $950 million on October 31, Year 3 and $1,002 on October 31, Year 4.
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Deere depreciates fixed assets using the straight line method for financial reporting. Depreciation expense was $319 million in Year 3 and $342 in Year 4. Deere uses accelerated depreciation for tax reporting.
Required
a. Using the criteria for revenue recognition, justify Deere's timing of revenue recognition for its equipment sales. Consider why recognition of revenue either earlier or later than the time of shipment to dealers would not be more appropriate.
b. Describe briefly how the balance sheet accounts of Deere & Company listed here would change if it recognized revenues during the period of production using the percentage-of completion method. You need not give amounts but indicate the likely direction of the change and describe the computation of its amount.
Accounts and Notes Receivable
Inventories
Retained Earnings
c. Respond to part b, assuming that Deere & Company recognized revenue using the installment method.
Accounts and Notes Receivable
Inventories
Retained Earnings
d. Compute the amount of cost of goods sold for Year 4, assuming that Deere & Company had used a FIFO instead of a LIFO cost-flow assumption.
e. Did the quantities and costs of inventory items likely increase or decrease during Year 4? Explain.
f. Compute the average age of Deere's depreciable assets at the end of Year 4.

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EXHIBIT 7.15 Deere & Company Income Statement amounts in millions) (Problem 7.16) Year Ended October 31: Year 4 Year 3 Revenues 1,196 12 1,276 1,105 899 S15,535 Finance Revenue (Note 2) Investment Revenue Total Revenues $19986 Expenses $13,568 $10,753 577 2,596 629 337 18,580 $14892 612 3,099 592 709 Selling, Administrative, and Other Expenses Interest Expense Income Tax Expense . EXHIBIT 7.16 Deere & Company Balance Sheet (amounts in millions) (Problem 7.16) October 31: Year 4 Year 3 3,18 85 247 16,417 1,999 2162 995 14,707 丨.366 2,076 1,125 Accounts and Notes Receivable (Note 2).cc Inventories (Note 3) Intangible assets, net. Other Assctspr.... 28754 $2638 Liabilities and Shareholders' Equity Short-Term Borrowing Accounts Payable and Accrued Expenses... Long-Term Borrowing. s3457 s4247 3,514 1,090 10444 Pension Liability..3.320 96 522 361 $22,255 Total Liabilitics Accumulated Other Comprehensive Loss... S 841 (43)(1.68) 5,4454329 639$4,002 Total Liabilities and Shareholders' Equity...84 $26258 Total Shareholders Equity Note 4: Property, plant, and equipment include the following October 31 Year 4 Year 3 79 1464 6 1,366 2.705 Buildings Dies, Patterns, and Tools. Other ..r 782 56,182 $5,834 4,020) 3,758) $2162 $2,076 76 October 31: Year 4 Year 3 $79 1,464 2,870 987 782 $6,182 $ 68 1,366 2,705 932 763 $5,834 Buildin Machinery and Equipment.... Other . $2,162 $2,076