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Chapter 18: 7BE (page 1032)

Referring to the revenue arrangement in BE18-6, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2018, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2018), and (b) Nair has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Short Answer

Expert verified

(a) Transaction price of $1,150,000.

(b) No transaction price.

Step by step solution

01

Definition of Transaction Price

The amount of money that a business entity will collect against the product or service provided to the customer is known as the transaction price.

02

Determination of the Transaction Price

(a) Since the chances of completing the building on 1 August 2018 is 70%, the company will report $1,150,000 as the transaction price.

(b) There is very limited information available for developing the completion estimates. Therefore, the business entity will not recognize any revenue until the completion of the project.

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Most popular questions from this chapter

(Determine Transaction Price) Aaron鈥檚 Agency sells an insurance policy offered by Capital Insurance Company for a commission of \(100 on January 2, 2017. In addition, Aaron will receive an additional commission of \)10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron鈥檚 significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Instructions

(a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold.

(b) Determine the revenue that Aaron will recognize in 2017.

Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer鈥檚 journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.

On May 10, 2017, Cosmo Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2017. Greig agrees to pay the full contract price of \(2,000 on July 15, 2017. The cost of the goods is \)1,300. Cosmo delivers the product to Greig on June 15, 2017, and receives payment on July 15, 2017. Prepare the journal entries for Cosmo related to this contract. Either party may terminate the contract without compensation until one of the parties performs

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

When must multiple performance obligations in a revenue arrangement be accounted for separately?
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