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Chapter 18: Q. 18-32E-2 (page 1040)

E18-32 (LO4) (Contract Costs, Collectibility) Refer to the information in E18-31.

Instructions

Dan鈥檚 Demolition is a startup company; as a result, there is more than insignificant uncertainty about Dan鈥檚 ability to make the 6-month payments on time. Does this uncertainty affect the amount of revenue to be recognized under the contract? Explain

Short Answer

Expert verified

Theprobability of collection of payment does not affect revenue recognition.

Step by step solution

01

Definition of Revenue Recognition

Revenue recognition is the principle stated under accounting that provides information regarding the different conditions under which the revenue must be recognized.

02

Effect of Ability to Make Payment on Revenue to be Recognized

The collectability of the payment from Dan will not affect the revenue recognized by Rex. The revenue must be reported at its gross amount, and then the business entity can make adjustments for any bad debt in the income statement. Suppose there is any doubt regarding the collectability of the revenue on the contract. In that case, it is assumed that parties are not performing their obligations, and the revenue must not be recognized until the issue is resolved.

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Most popular questions from this chapter

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

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer鈥檚 expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

Instructions

(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) On July 1, 2017, Uddin shipped books invoiced at \(15,000,000 (cost \)12,000,000). Prepare the journal entry to record this transaction.

(d) On October 3, 2017, \(1.5 million of the invoiced July sales were returned according to the return policy, and the remaining \)13.5 million was paid. Prepare the journal entries for the return and payment.

(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.

Explain the current environment regarding revenue recognition.

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

(b) Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2017, and December 31, 2017.

Destin Company signs a contract to manufacture a new 3D printer for \(80,000. The contract includes installation which costs \)4,000 and a maintenance agreement over the life of the printer at a cost of $10,000. The printer cannot be operated without the installation. Destin Company as well as other companies could provide the installation and maintenance agreement. What are Destin Company鈥檚 performance obligations in this contract?
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