(Observing the effects of different revenue-recognition methods on financial ratios, LO 2, 3, 5,6) Antler Manufacturing Ltd. (Antler) is a newly formed company specializing in the production of high-quality machine parts. Paul Wayne incorporated Antler on the understanding that it would receive a large contract from his previous employer, Pocologan Inc. (Pocologan), to manufacture parts. Antler has rented the space and equipment it needs to operate its business. During Antler’s first year of operations, the following transactions and economic events take place:

i. January 3, 2005: Paul Wayne contributes $500,000 cash in exchange for 100,000 common shares in Antler.

ii. January 5, 2005: Antler borrows $250,000 from Pocologan. The loan carries an interest rate of 10% per year. No interest or principal needs to be paid until 2008.

iii. January 8, 2005: Antler rents space and equipment to operate the business.
Rent of $200,000 for two years is paid.
iv. January 10, 2005: Antler signs the contract with Pocologan. The contract requires that Antler manufacture and deliver $4,000,000 in parts over the period July 1, 2005 to December 31, 2007. The contract requires payment by Pocologan within 90 days of each delivery by Antler. The selling price of all parts is specified in the contract. Antler begins production of the parts immediately.
v. During 2005 Antler produced and delivered parts, and collected cash in the following amounts:

vi. All costs incurred to produce the parts were purchased on credit. Of the $840,000 incurred to produce parts in 2005, $760,000 had been paid by December 31, 2005.
vii. During 2005 Antler incurred additional costs of $210,000, all on credit. As of December 31, 2005, $175,000 of these costs had been paid. Because these costs were not directly related to the production of parts, Antler plans to expense them in full in 2005. This amount does not include the amount paid for rent and the interest expense.
viii. Antler has a December 31 year end.
Required:

a. Use an accounting equation spreadsheet to record the transactions and economic events that occurred in 2005 for Antler. Prepare a separate spreadsheet using the following critical events for recognizing revenue:
i. Production.
ii. Delivery.
iii. Collection of cash.

b. Prepare Antler’s income statement for 2005 and its balance sheet as of December 31, 2005, using each of the three critical events (production, delivery, and collection of cash). Your income statements should show revenue, cost of goods sold, gross margin, other expenses, and net income.

c. Calculate the gross margin percentage, profit margin percentage, current ratio, and the debt-to-equity ratio for 2005 for each critical event.

d. Which method of calculating the ratios in

(c) gives the best indication of Antler’s performance and liquidity? Explain.

e. Does it matter how Antler recognizes revenue? To whom does it matter and why?

f. Is the actual economic performance of Antler affected by how it recognizes revenue? Explain.

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Selling price of parts produced during 2005 Cost of parts produced during 2005 Selling price of parts delivered to Pocologan during 2005 Cost of parts delivered to Pocologan during 2005 Cash collected from Pocologan during 2005 Cost of parts that were paid for by Pocologan during 2005 $1,400,000 840,000 900,000 540,000 525,000 315,000