Group 1 | Reyes, Christelle / San Felipe, Alyssa / Sastre, Ren

Solve Case Study, JOAN HOLTZ (A), of the textbook. Solve also problem 5-2.

Problem 5-2
Income before tax $1,250,000

A. Completed contract method

This Year Next Year
Income excluding motel project $ 1,250,000.00 $ 1,250,000.00
Income from motel project $- $ 750,000.00
Income before taxes $ 1,250,000.00 $ 2,000,000.00

B. Percentage of Completion
This Year Next Year
Income excluding motel project $ 1,250,000.00 $ 1,250,000.00
Income from motel project $ 450,000.00 $ 300,000.00
Income before taxes $ 1,700,000.00 $ 1,550,000.00

Giamatti should use a completed contract method

Group 1 | Reyes, Christelle / San Felipe, Alyssa / Sastre, Ren
Group 1 | Reyes, Christelle / San Felipe, Alyssa / Sastre, Ren

1. Electric utility bills

Electric companies such as Meralco may bill their customers following (1) the
revenue recognition principle or (2) cash basis accounting. The revenue recognition principle
records revenue following provision of service, thus independent of cash payments by
customers. Companies are able to estimate customer’s usage through historical data,
following the assumption that power usage is generally constant on a monthly basis. In this
case, companies who follow the revenue recognition principle will record December
electricity usage under the same accounting period. On the other hand, cash basis
accounting recognizes revenue upon receipt of cash, thus accounting December revenue
Group 1 | Reyes, Christelle / San Felipe, Alyssa / Sastre, Ren

under January. It is important to note however that the revenue recognition principle is more
in line with the matching principle.

2. Retainer fee
Retainer fees are down payments made by customers to obtain professional services
in the future. Given that the timing of services to be provided is unforeseeable, a
conservative approach in recording this would be accounting 50% of the whole payment
($5,000) as revenue in 2010 on the grounds that service involved is “readiness to serve”,
while the other 50% will be recorded on the following year. Another means to record this
would be recognizing the whole ($10,000) as revenue earned in year 2010, on the grounds
that the future legal services will be billed on a separate account

3. Cruise
The revenue should not be recognized in 2010. Revenue will subsequently be tallied only
when Raymond completes the sales agreement or purchase orders. The revenue cannot be
calculated until after the 2011 services have been rendered. If a passenger cancels his
reservations before the trip happened, revenue still has not yet been booked. Only when
then trip has taken off would there be a difference.

5. Unbilled receivables
● In-process projects valued at the rates at which the customers will be charged for the
architect’s time
● Why would a firm do this instead of valuing projects in process at their cost, the same
as a manufacturing firm would value its in-process inventory?
○ Unbilled receivables sometimes occur as a built-in function of certain
types of business relationships. Contractor billing, such as with the
architect for this case, is an example. In these types of relationships,
revenue is typically collected when an individual project or milestone in
a project is finished. Any work done before project or milestone
completion is an unbilled receivable because the invoice has yet to be
created.
● Does it make any difference in the reported owner’s equity for the architectural firm to
report such in-process work as receivables rather than as inventory? Why?
○ Unbilled receivables are reported under assets so it should not make a
difference to the reported owner’s equity.

6. Premium coupons
● Manufacturer of coffee: premium coupon with each $2.50 jar of coffee sold to
retailers
○ Customers could use this coupon to apply $0.50 of the price of a new type of
instant tea that the manufacturer was introducing and that sold for $2.00
wholesale.
○ The manufacturer reimbursed retail stores $0.60 for each such coupon they
submitted.The extra $0.10 was to pay the grocer for coupon handling costs.
● Past experience with similar premium offers indicated that approximately 20 percent
of such coupons are eventually redeemed. At the end of 2010, however, only about
10 percent of the coupons issued in 2010 had been redeemed.
Group 1 | Reyes, Christelle / San Felipe, Alyssa / Sastre, Ren

● In recording the revenues for the company for 2010, what allowance, if any, should
be made for these coupons? Why? If an allowance should be made, should it apply
to the sales revenue of coffee or to the sales revenue of tea? Why?
○ Sales discount, a contra-revenue account, will be added in the income
statement to record the use of the coupons.
○ This would apply to the sales revenue of the tea because the $0.50 will
be deducted from the price of the tea that sells for $2.00.

7. Traveler’s checks
● A bank sells a customer $500 of American Express traveler’s checks, for which the
bank collects from the customer $505. (The bank charges a 1 percent fee for this
service.)
● How does the bank record this transaction? How does the transaction affect
American Express’s balance sheet?
○ A traveler’s check operates like cash in accounting. This is reported on
the company's balance sheet as part of the current asset: cash.
○ A bank's balance sheet lists the total amount of its customers' checking
account balances as a current liability.
○ A $5 revenue will also be recorded in the income statement for the
service fee the bank charged to the customer.