PROBLEMS

$23$ P$18-1($Comprehensive Three$-$Part Revenue Recognition$)$ Van Hatten Industries has three operating $46$ divisions$-$Depp Construction Division, DeMent Publishing Division, and Ankiel Securities Division. Each division maintains its own accounting system and method of revenue recognition.

Depp Construction Division

During the fiscal year ended November $30,2012,$ Depp Construction Division had one construction project in process. A $$30,0\mathrm{.}00,000$ contract for construction of a civic center was granted on June $19,2012,$ and construction began on August $1,2012.$ Estimated costs of completion at the contract date were $$25,000,000$ over a $2-$year time period from the date of the contract. On November $30,2012,$ construction costs of $$7,200,000$ had been incurred and progress billings of $$9,500,000$ had been made. The construction costs to complete the remainder of the project were reviewed on November $30,2012,$ and were estimated to amount to only $$16,800,000$ because of an expected decline in raw materials costs. Revenue recognition is based upon a percentage$-$of$-$completion method.

DeMent Publishing Division

The DeMent Publishing Division sells large volumes of novels to a few book distributors, which in turn sell to several national chains of bookstores. DeMent allows distributors to return up to $30\%$ of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged $20\%$ in each of the past $5$ years. A total of $$7,000,000$ of paperback novel sales were made to distributors during fiscal $2012.$ On November $30,2012($the end of the fiscal year$),$ $$1,500,000$ of fiscal $2012$ sales were still subject to return privileges over the next $6$ months. The remaining $$5,500,000$ of fiscal $2012$ sales had actual returns of $21\%.$ Sales from fiscal $2011$ totaling $$2,000,000$ were collected in fiscal $2012$ less $18\%$ returns. This division records revenue according to the method referred to as revenue recognition when the right of return exists.

Ankiel Securities Division

Ankiel Securities Division works through manufacturers' agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and the division ships the goods f$.$o$.$b$.$ factory directly to customers $($usually police departments and security guard companies$).$ Customers are billed directly for the balance due plus actual shipping costs. The company received orders for $$6,000,000$ of goods during the fiscal year ended November $30,2012.$ Down payments of $$600,000$ were received, and $$5,200,000$ of goods were billed and shipped. Actual freight costs of $$100,000$ were also billed. Commissions of $10\%$ on product price are paid to manufacturing agents after goods are shipped to customers. Such goods are warranted for $90$ days after shipment, and warranty returns have been about $1\%$ of sales. Revenue is recognized at the point of sale by this division.

Instructions

$($a$)$ There are a variety of methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles.

$(1)$ Point of sale.

$(2)$ Completion$-$of$-$production.

$(3)$ Percentage$-$of$-$completion.

$(4)$ Installment$-$sales.

$($b$)$ Compute the revenue to be recognized in fiscal year $2012$ for each of the three operating divisions of Van Hatten Industries in accordance with generally accepted accounting principles.