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Acct 3401 Financial Statements Project Spring, 2017 Revenue from Long-Term Contracts Exercise Name: ____________________________ Class Time: __________________ This Topic assignment is worth 10 points. It is due no later than the beginning of class on Tue. Mar. 14. Background: It is January, 2017 and you have just been hired as the financial reporting guru for TECHNOGYM, a diversified exercise/fitness corporation that has just finished a very fast-paced, dynamic year. TECHNOGYM began as the sole distributor of TechTone, a full-body fitness machine sold to fitness centers and hospitals. This remains the main operation of TECHNOGYM's business. Your predecessor left the firm in a hurry. Your primary responsibility is to finish the 2016 year-end financial statements. Luckily, there is still time to make any necessary correcting and/or adjusting journal entries for the 2016 fiscal year. To give you a better understanding of the decisions made by your predecessor, at time you will be asked to reproduce results from 2015. Throughout the semester you will work on different aspects of the company's financial records. This exercise relates to revenue recognition. Future exercises will relate to: accounts receivable, and inventory. Near the end of the semester, you will combine these exercises in a comprehensive financial reporting and analysis exercise. General Information TECHNOGYM uses a Jan. 1 - Dec. 31 financial year TECHNOGYM's effective income tax rate and the number of shares of common stock outstanding are shown below each trial balance You should assume that \"Revenue From Other Products\" and \"Cost of Other Products\" should be included with TechTone as primary operations You should assume that all \"Depreciation Expense\" and \"General and Admin Expenses\" are considered operating expenses Exercise for Revenue Recognition of a Long-Term Contract: TECHNOGYM has a division that builds university fitness centers. At the end of 2016, there was one building project in process, the $45,000,000 Western Sky University project (WSU), which was started in June 2015. This project satisfied one of the requirements to recognize revenue over a period of time using the cost-to-cost method to determine percentage of completion. The original estimated costs for the WSU project totaled $41,750,000 but there were substantial increases in the cost of materials during 2015 that resulted in a higher estimate being used to prepare the adjusting entry at the end of 2015 (labeled \"2015 AJE\" in the T-account below). Throughout 2016, routine transaction entries were to record construction costs, billings, and collections; these are reflected in the T-accounts below. During 2016 there were substantial additional cost increases, resulting in a 2016 year-end total cost estimate of $45,500,000 for the job. The contract does not allow for renegotiation of the contracted price. TECHNOGYM has a legally binding enforceable contract with the university and all parties are expected to be able to perform under the contracts. The general ledger accounts show the following activity before any 2016 year-end adjusting entries: Construction in Process 2015 $16,700,00 0 2015 AJE 900,000 2016 WSU 15,000,000 Unadj. $32,600,00 Billings on Contracts $20,000,00 0 12,000,000 $32,000,00 Page 1 of 3 2015 2016 WSU Unadj. Acct 3401 Financial Statements Project Spring, 2017 Revenue from Long-Term Contracts Exercise 0 0 Requirement 1: What was the amount of the revised estimated total project construction costs at the end of 2015? Show your calculations! You have enough information to find out the amount. Requirement 2: What adjusting journal entry was made on Dec. 31, 2015 related to this construction project? Remember to show the journal entry in proper form! Requirement 3: What line item(s) appeared on the Dec. 31, 2015 Income Statement related to this construction project? Requirement 4: Calculate the amount of revenue and expense that should be recognized on the 2016 income statement related to this construction project. Show your calculations! Page 2 of 3 Acct 3401 Financial Statements Project Spring, 2017 Revenue from Long-Term Contracts Exercise Requirement 5: What adjusting journal entry was made on Dec. 31, 2016 related to this construction project? Remember to show the journal entry in proper form! Requirement 6: What is the Dec. 31, 2016 ending balance in the Construction in Process account? Show your calculations! Requirement 7: What Contract Asset or Contract Liability (with amount) will appear on the Dec. 31, 2016 Balance Sheet related to this construction project? Show your calculations! Note: the \"Contract Asset\" account is sometimes called \"Cost and Profits in Excess of Billings\"; the \"Contract Liability\" account is sometimes called \"Billings in Excess of Cost and Profits\" Page 3 of 3