Reference no: EM133035817

Questions -

Q1. Olivia Company is constructing an office building under contract. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and the company estimates total costs of $14,200,000. The company estimates that the building will take 3 years to complete and construction commences on 2022. At December 31, 2023 Olivia Company estimates that it is 75% complete with their current construction project; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases.

a. How much is the difference, debit/(credit) between the construction in progress and the billings on construction in progress reported?

b. If the building was 30% completed by the end of 2022, how much is the total amount of expenses to be reported for 2023?

Q2. On December 31, 2021, RM Company authorized GINNY to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement, and the balance, represented by a note, is due in three annual payments of $30,000 each, beginning December 31, 2022. The present value on December 31, 2021 of the 3 annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by RM, however, substantial future services are required of RM. Collectability of the note is reasonably certain. On December 31, 2021, how much should RM record as unearned franchise fees in respect of the GINNY franchise?

Q3. Sheeran Company charges an initial franchise fee of $500,000 for the right to operate to operate as a franchise of Sheeran. Of this amount, $100,000 is payable when the agreement was signed and the balance is payable in a noninterest bearing note in five annual payments of $80,000 each. In return for the initial franchise fee, the franchisor will help locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide the bookkeeping services. The credit rating of the franchisee indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of $80,000 each discounted at 8% is $319,416.80. The discount represents the interest revenue to be accrued by the franchisor over the payment period. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectability of the note is reasonably assured and substantial performance has occurred: how much are the earned and unearned franchise fees?