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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

(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.

Presented below are five different situations. Provide an answer to each of these questions.

1. The Kawaski Jeep dealership sells both new and used Jeeps. Some of the Jeeps are used for demonstration purposes; after 6 months, these Jeeps are then sold as used vehicles. Should Kawaski Jeep record these sales of used Jeeps as revenue or as a gain?

2. One of the main indicators of whether control has passed to the customer is whether revenue has been earned. Is this statement correct?

3. One of the five steps in determining whether revenue should be recognized is whether the sale has been realized. Do you agree?

4. One of the criteria that contracts must meet to apply the revenue standard is that collectibility of the sales price must be reasonably possible. Is this correct?

5. Many believe the distinction between revenue and gains is important in the financial statements. Given that both revenues and gains increase net income, why is the distinction important?

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?

Question: P18-9 (LO5,6) EXCEL (Recognition of Profit on Long-Term Contract) Shanahan Construction Company has entered into a contract beginning January 1, 2017, to build a parking complex. It has been estimated that the complex will cost \(600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at \)900,000. The following data pertain to the construction period.

2017

2018

2019

Cost to date

\(270,000

\)450,000

$610,000

Estimated cost to Complete

330,000

150,000

-

Progress billing to date

270,000

550,000

900,000

Cash collected to date

240,000

500,000

900,000

Instructions

Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.

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?
See all solutions

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