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Chapter 18: Q14E (page 1037)

Question: (Allocate Transaction Price) Refer to the revenue arrangement in E18-13.

Instructions

Repeat requirements (a) and (b) assuming Crankshaft does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $36,000; Crankshaft prices these services with a 25% margin relative to cost.

Short Answer

Expert verified

Answer

  1. Allocated service obligation: Equipment:$956,938; installment: $43,062.

Both sides of the journal total$2,643,062

Step by step solution

01

Definition of Unearned Revenue

Unearned revenue can be defined as the liability that a business entity records for the revenue received in advance. The business entity adjusts this liability when the service or product for the advance revenue is provided.

02

Allocation of transaction price among service obligations

A service obligation of $1,000,000 needs to be allocated.

Allocationtoequipment=StandalonesellingpriceofequipmentTotalsellingprice脳Serviceobligation=$1,000,000$1,045,000脳$1,000,000=$956,938Allocationtoinstallment=StandalonesellingpriceofequipmentTotalsellingprice脳Serviceobligation=$45,000$1,045,000脳$1,000,000=$43,062

Working note:

The standalone selling price of Equipment is $1,000,000.

The standalone selling price of the installation is:

Particular

Amount $

Add: installation

36,000

Add: Profit margin on installation @25% of $36,000

9,000

Standalone selling price of installation

$45,000

Calculation of selling price:

Particular

Amount $

Selling price

$1,000,000

Add: installation

36,000

Add: Profit margin on installation @25% of $36,000

9,000

Total selling price

$1,045,000

03

Journal entries for revenue arrangement on 1 June 2017

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 June 2017

Accounts receivable

1,000,000

Unearned service revenue for

installation

43,062

Sales revenue (Equipment)

956,938

1 June 2017

Cost of goods sold

600,000

Inventory

600,000

30 Sep 2017

Unearned service revenue

43,062

Service revenue

43,062

30 Sep 2017

Cash

1,000,000

Accounts receivable

1,000,000

$2,643,062

$2,643,062

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Most popular questions from this chapter

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.

Instructions

(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.

(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.

Describe the critical factor in evaluating whether a performance obligation is satisfied.

Ismail Construction enters into a contract to design and build a hospital. Ismail is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing. Does Ismail have a single performance obligation to the customer in this revenue arrangement? Explain.

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

(c) Repeat the requirements for part (a), assuming that Tablet Tailors has no reliable data with which to estimate the stand-alone selling price for the Internet service.

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.
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