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Chapter 18: 1BE (page 1032)

Leno Computers manufactures tablet computers for sale to retailers such as Fallon Electronics. Recently, Leno sold and delivered 200 tablet computers to Fallon for $20,000 on January 5, 2017. Fallon has agreed to pay for the 200 tablet computers within 30 days. Fallon has a good credit rating and should have no difficulty in making payment to Leno. (a) Explain whether a valid contract exists between Leno Computers and Fallon Electronics. (b) Assuming that Leno Computers has not yet delivered the tablet computers to Fallon Electronics, what might cause a valid contract not to exist between Leno and Fallon?

Short Answer

Expert verified

The contract would be invalid in case Two, and would be valid in case One.

Step by step solution

01

Meaning of Valid Contract

A valid contract is a legally binding and enforceable agreement. In a valid contract, both parties are bounded legally for the fulfillment of their obligations. A contract must be accepted by both partiesbefore entering into contractual obligations.

02

Validity of a contract is based upon the agreed conditions and their fulfillment

A contract must fulfill five requirements to be valid:

  • The contract is commercially viable:It means that there should be some consideration in return for goods and services provided by one party to another.
  • The contract has been approved by both parties:It means that one party agrees to purchase a particular product or service and another party agrees to sell it to that party.
  • It is established that the parties' rights are identified:It means that the purchasing party has the right to the particular product and the selling party has the right to the consideration in return.
  • The terms of payment are specified:It means that the purchasing party agrees to pay some consideration in return for the product and services.
  • It's quite likely that the consideration will be collected:It means that the selling party has received the consideration before they deliver the product or service to the purchasing party.
  1. In case one, the contract is valid because they fulfill all the above conditions and perform their obligations.
  2. In case two, the contract is invalid because they have not performed their obligations, and the conditions are not fulfilled.

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Most popular questions from this chapter

Explain the reporting for (a) costs to fulfill a contract and (b) collectibility.

(Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin鈥檚 credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.

Instructions

(a) Prepare Zagat鈥檚 journal entry necessary on March 1, 2017.

(b) Prepare Zagat鈥檚 journal entry for the repurchase of the ingots on May 1, 2017.

For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?
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