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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

Cramer Corp. sells idle machinery to Enyart Company on July 1, 2017, for \(40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2018, for a price of \)42,400 (an imputed interest rate of 6%).

Instructions

(a) Prepare the journal entry for Cramer for the transfer of the asset to Enyart on July 1, 2017.

(b) Prepare any other necessary journal entries for Cramer in 2017.

(c) Prepare the journal entry for Cramer when the machinery is repurchased on June 30, 2018.

P18-4 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy鈥檚 main products are as follows

Item

Standalone Selling price (cost)

Refrigerator

\(500 (\)260)

Range

560 (275)

Stackable washer/dryer unit

700 (400)

Customers can contract to purchase either individually at the stated prices or a three-item bundle with a price of $1,800. The bundle price includes delivery and installation. The economy also provides installation (not a separate performance obligation).

Instructions

Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co.

(c) Refer to the arrangement in part (b). It would help Yellowcard secure lease agreements with students if the installation of the appliance bundles can be completed by July 1, 2017. Yellowcard offers a 10% bonus payment if the Economy can complete installation by July 1, 2017. The economy estimates its chances of meeting the bonus deadline to be 90%, based on a number of prior contracts of a similar scale. Repeat the requirement for part (b), given this bonus provision. Assume installation is completed by July 1, 2017.

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019鈥�2020) for \)800.

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(a) Prepare any journal entries to record the revenue arrangement for Tablet Bundle A on January 2, 2017, and December 31, 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.
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