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Chapter 18: Q18-11E (page 1036)

Refer to the revenue arrangement in E18-10. Repeat the requirements, assuming (a) Geraths estimates the standalone selling price of the installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the standalone selling price of the installation. (Round amounts to nearest dollar.)

Short Answer

Expert verified

Answer

Revenues recognized by the company is$2,400.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Revenue Recognition

In accounting, revenue recognition is a principle that facilitates business entitiesto identify when and in which specific condition revenues should be recognized and recorded in the books of accounts.

02

Computation of revenue recognized

Particulars

Amount ($)

Price of window

2,000

Add: Installation [$400+ ($400*20%)]

480

Total cost of window

2,480

Allocation:

Windows (2,000/2,480)*2,400

1,935

Add: Installation (480/2,480)*2,400

465

Revenue recognized

$2,400

Journal Entries:

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

July 1

No entry

Sep 1

Cash

2,000

Accounts receivable

400

Unearned service revenue

465

Sales revenue

1,935

(To record the sales)

Sep 1

Cost of goods sold

1,100

Inventory

1,100

(To record the cost of goods sold)

Oct 15

Cash

400

Unearned service revenue

465

Service revenue (Installation)

465

Accounts receivable

400

(To record the receipt of payment)

03

Solution when Geraths in unable to develop a reliable estimate

A residual approach should be applied when Geraths is unable to estimate the cost for installation. Under this approach, the total fair value of the contract is $2,400, and it is given that windows have a standalone fair value of $2,000,then $400 must be allocated to the installation.

Journal Entries:

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

Sep 1

Cash

2,000

Accounts receivable

400

Unearned service revenue

400

Sales revenue

2,000

(To record the sales)

Oct 15

Cash

400

Unearned service revenue

400

Service revenue (Installation)

400

Accounts receivable

400

(To record the receipt of payment)

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Most popular questions from this chapter

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.

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.

What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

What was viewed as a major criticism of GAAP as it relates to revenue recognition?
See all solutions

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