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Chapter 18: 13BE (page 1033)

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt鈥檚 journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.

Short Answer

Expert verified

No Entry on 31st October 2017

Step by step solution

01

Right to Return

A customer'sright of return frequently allows them to a full or partial refund of their purchase price, as well as a credit for future purchases. Under the new standard, a right of return is not a distinct performance requirement, but it does have an impact on the transaction price predicted for transferred products.

02

Journal entries

Date

Particulars

Debit ($)

Credit ($)

July 10, 2017

Account receivable a/c

700,000

Sales revenue a/c

700,000

July 10, 2017

Cost of goods sold a/c

560,000

Inventory a/c

560,000

October 11, 2017

Sale return and allowance a/c

78,000

Account receivable a/c

78,000

October 11, 2017

Inventory Return a/c

62,400

Cost of goods sold

62,400

Calculation of Cost of Goods Sold return is as follows:

Returncostofgoodssold=COGS鈥�SoldSalesrevenue脳Valueofsalesrevenuereturn=$560,000$700,000脳78,000=$62,400

Note: No entry is required for October 31, 2017.

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Most popular questions from this chapter

Frozen Delight, Inc. charges an initial franchise fee of \(75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, \)25,000 is collected immediately. The remainder is collected in four equal annual installments of \(12,500 each. These installments have a present value of \)41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

Explain the importance of a contract in the revenue recognition process.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(b) Prepare all necessary journal entries for 2018.

Question: P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.

Instructions

Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer鈥檚 gas line for a total price \(800. On a standalone basis, the grill sells for \)700 (cost \(425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is \)150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2017, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2017. Prepare journal entries for Grill Master for GM205 in April and May 2017.
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