The Dahlia Company has two divisions, the Astor Division which started operating in 2005, and the Tulip Division which started operating in 2006. The Astor Division leases medical equipment to hospitals. All of its leases are appropriately recorded as operating leases for accounting purposes, except for a major lease entered into on January 1, 2007, which is appropriately recorded as a sale-type lease for accounting purposes.
Under long-term contracts, Tulip constructs wastewater treatment plants for small communities throughout the United States. All of its long-term contracts are appropriately recorded for accounting purposes under the percentage-of-completion method, except for two contracts which are appropriately recorded for accounting purposes under the completed-contract method because of a lack of dependable estimates at the time of entering into these contracts. For the year ended December 31, 2007 the following information is available:
Operating Leases. Revenues from operating leases were $800,000. The cost of the related leased equipment is $3,700,000, which is being depreciated on a straight-line basis over a five-year period. The estimated residual value of the leased equipment at the end of the five-year period is $200,000. No leased equipment was acquired or constructed in 2007. Maintenance and other related costs and the costs of any other services rendered under the provisions of the leases were $70,000 in 2007.
Lease Recorded as a Sale. The January 1, 2007 lease recorded as a sale is for a six-year period expiring December 31, 2012. The cost of this leased equipment is $3,500,000. This leased equipment is estimated to have no residual value at the end of the lease. Maintenance and other related costs, and the costs of any other services rendered under the provisions of this lease, all of which were paid by the lessee, were $120,000 in 2007. Equal annual payments under the lease are $750,000 and are due on January 1. The first payment was made on January 1, 2007. The present value for an annuity of $1 in advance at 10% is as follows:
Number of Periods Present Value
Long-Term Contracts: Percentage-of-Completion Method. Long-term contracts recorded under the percentage-of-completion method aggregate $6,000,000. Costs incurred on these contracts were $1,500,000 in 2006 and $3,000,000 in 2007. Estimated additional costs of $1,000,000 are required to complete these contracts. Revenues of $1,740,000 were recognized in 2006 and a total of $4,800,000 has been billed, of which $4,600,000 has been collected. No long-term contracts recorded under the percentage-of-completion method were completed in 2007.
Long-Term Contracts: Completed-Contract Method. The two long-term contracts recorded under the completed-contract method were started in 2006. One is a $5,000,000 contract. Costs incurred were $1,400,000 in 2006 and $1,600,000 in 2007. A total of $3,100,000 has been billed and $2,800,000 collected. Although it is difficult to estimate the additional costs required to complete this contract, indications are that this contract will prove to be profitable.
The second contract is for $4,000,000. Costs incurred were $1,200,000 in 2006 and $2,600,000 in 2007. A total of $3,300,000 has been billed and $2,900,000 collected. Although it is difficult to estimate the additional costs required to complete this contract, indications are that there will be a loss of approximately $550,000.
Selling, general, and administrative expenses exclusive of amounts specified earlier were $600,000 in 2007. Other income exclusive of amounts specified earlier was $50,000 in 2007.
Prepare an income statement of the Dahlia Company for the year ended December 31, 2007, stopping at income (loss) before income taxes. Show supporting schedules and computations in good form. Ignore income tax and deferred tax considerations. Notes are not required.