simona amanar industries has two operating divisions gina constr 264273

Simona Amanar Industries has two operating divisions—Gina Construction Division and Chorkina Securities Division. Each division maintains its own accounting system and method of revenue recognition.

Gina Construction Division

During the fiscal year ended November 30, 2008, Gina Construction Division had one construction project in process. A $30,000,000 contract for construction of a civic center was granted on June 19, 2008, and construction began on August 1, 2008. 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, 2008, construction costs of $7,800,000 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, 2008, and were estimated to amount to only $16,200,000 because of an expected decline in raw materials costs. Revenue recognition is based upon a percentage of completion method.

Chorkina Securities Division

Chorkina 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, 2008. 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) Completed contract.

(3) Percentage of completion.

(4) Installment sales.

(b) Compute the revenue to be recognized in fiscal year 2008 for the two operating divisions of Simona Amanar Industries in accordance with generally accepted accounting principles.