1.
Introduction: Generally Accepted Accounting Principles state that revenue must be recognized in the period in which it is earned. Hence for long-term projects, the use of the percentage completion method is mandatory. However, this rule does not apply to projects that will be completed within 2 years and to contractors with gross receipts not exceeding $25 million in the preceding 3 years. In addition, the project must fulfill the following conditions:
Payment for the work will be received.
Reasonable estimates of costs or percentage of completion are possible.
The percentage of completion and the amount to accrue.
2.
Introduction: Generally Accepted Accounting Principles state that revenue must be recognized in the period in which it is earned. Hence for long-term projects, the use of the percentage completion method is mandatory. However, this rule does not apply to projects that will be completed within 2 years and to contractors with gross receipts not exceeding $25 million in the preceding 3 years. In addition, the project must fulfill the following conditions:
Payment for the work will be received.
Reasonable estimates of costs or percentage of completion are possible.
The action that should be taken in 2025.
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HORNGREN'S FINANCIAL & MANGERIAL ACCOUNT
- Your company has been approached to bid on a contract to sell 19,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,000,000 and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $140,000 to be returned at the end of the project, and the equipment can be sold for $260,000 at the end of production. Fixed costs are $795,000 per year and variable costs are $43 per unit. In addition to the contract, you feel your company can sell 4,600, 12,200, 14,200, and 7,500 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 23 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only…arrow_forwardYour company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.5 million and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $415,000 which will be returned at the end of the project, and the equipment can be sold for $345,000 at the end of production. Fixed costs are $590,000 per year, and variable costs are $79 per unit. In addition to the contract, you feel your company can sell 12,200, 14,300, 18,300, and 10,800 additional units to companies in other countries over the next four years, respectively, at a price of $181. This price is fixed. The tax rate is 24 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the…arrow_forwardYour company has been approached to bid on a contract to sell 20,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3,400,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $110,000 to be returned at the end of the project, and the equipment can be sold for $230,000 at the end of production. Fixed costs are $765,000 per year and variable costs are $37 per unit. In addition to the contract, you feel your company can sell 4,000, 11,600, 13,600, and 6,900 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 22 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only…arrow_forward
- Your company has been approached to bid on a contract to sell 21,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,200,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $150,000 to be returned at the end of the project, and the equipment can be sold for $270,000 at the end of production. Fixed costs are $805,000 per year and variable costs are $45 per unit. In addition to the contract, you feel your company can sell 4,800, 12,400, 14,400, and 7,700 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate is 25 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only…arrow_forwardJohnson Limited is contemplating the installation of a new system that would allow for automated handling of customer inquiries about their order status, account balances, etc. Currently all such inquiries are handled manually by customer service representatives. The software for the new system would cost $214,000. An additional $169,000 would be required for one-time installation costs. Management estimates that the new system would result in costs of $10,300 per year related to addressing software issues and other technological problems that may arise. However, the new system is expected to reduce labour costs by $65,000 per year. Management estimates that the system would be used for five years. Severance costs related to the employees that would be laid off after implementing the new system would be $22,600. Johnson Limited requires a return of at least 15% on investments of this type. Required: Ignore income taxes. 1. Compute the net annual cost savings promised by the new system.…arrow_forwardA small company that manufactures vibration isolation platforms is trying to decide whether it should immediately upgrade the current assemblysystem D, which is rather labor-intensive, with the more highly automated system C one year from now. Some components of the current system canbe sold now for $9000, but they will be worthless hereafter. The operating cost of the existing system is $192,000 per year. System C will cost $320,000 with a $50,000 salvage value after four years. Its operating cost will be $68,000 per year. If you are told to do a replacement analysis using an interest rate of 10% per year, which system do you recommend?arrow_forward
- A small company that manufactures vibration isolation platforms is trying to decide whether itshould replace the current assembly system (D), which is rather labor intensive, at present or 1 yearfrom now with a system that is more automated (C). Some components of the current system can besold immediately for $9,500, but they will be worthless hereafter. The operating cost of the existingsystem is $161,000 per year. System C will cost $310,000with a $50,000 salvage value after 4 years.Its operating cost will be $65,000 per year. If you are told to do a replacement analysis using aninterest rate of8% per year, which system would you recommend?arrow_forwardAn assembly operation at a software company now requires $100,000 per year in labor costs. A robot can be purchased and installed to automate this operation. The robot will cost $200,000 and will have no market value at the end of the 10-year study period. Maintenance and operation expenses of the robot are estimated to be $64,000 per year. Invested capital must earn at least 12% per year. Use the IRR method to determine if the robot is a justifiable investment.arrow_forwardJonathan Butler, process engineer, knows that the acceptance of a new process design will depend on its economic feasibility. The new process is designed to improve environmental performance. On the negative side, the process design requires new equipment and an infusion of working capital. The equipment will cost $1,200,000, and its cash operating expenses will total $270,000 per year. The equipment will last for 7 years but will need a major overhaul costing $120,000 at the end of the fifth year. At the end of 7 years, the equipment will be sold for $96,000. An increase in working capital totaling $120,000 will also be needed at the beginning. This will be recovered at the end of the 7 years. On the positive side, Jonathan estimates that the new process will save $400,000 per year in environmental costs (fines and cleanup costs avoided). The cost of capital is 12%. PRESENT VALUE YEAR 7 = ???arrow_forward
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