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Chapter 18: Q18-3P-1 (page 1043)

Question: P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.

Instructions

Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer鈥檚 gas line for a total price \(800. On a standalone basis, the grill sells for \)700 (cost \(425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is \)150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2017, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2017. Prepare journal entries for Grill Master for GM205 in April and May 2017.

Short Answer

Expert verified

Answer

Both sides of the journal totals$20,250.

Step by step solution

01

Definition of Cost of Goods Sold

The line item representing the total sacrifices made by the business entity in the production process of the goods sold to the customer is known as the cost of goods sold.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

20 April 2017

Cash

$8,000

Unearned service revenue

$1,412

Unearned sales revenue

$6,588

15 May 2017

Unearned service revenue

$1,412

Unearned sales revenue

$6,588

Service revenue

$1,412

Sales revenue

$6,588

15 May 2017

Cost of goods sold

$4,250

Inventory

$4,250

$20,250

$20,250

Working note:
Allocation of total revenue: $8,000

Particular

Cost

/

Total cost

X

Total revenue

=

Allocated revenue

Equipment

$7,000

/

$8,500

X

$8,000

=

$6,588

Installation

$1,500

/

$8,500

X

$8,000

=

$1,412

$8,000

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Most popular questions from this chapter

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.

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.

Question: P18-10 (LO5,6,7) (Long-Term Contract with Interim Loss) On March 1, 2017, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of \(8,400,000. The building was completed by October 31, 2019. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2017, 2018, and 2019 are given below.

2017

2018

2019

Contract cost incurred during the year

\)2,880,000

\(2,230,000

\)2,190,000

Estimated cost to complete the contract at 12/31

3,520,000

2,190,000

0

Billings to Fabrik during the year

3,200,000

3,500,000

1,700,000


Instructions

Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore incomes taxes.)

On October 2, 2017, Laplante Company sold \(6,000 of its elite camping gear (with a cost of \)3,600) to Lynch Outfitters. As part of the sales agreement, Laplante includes a provision that if Lynch is dissatisfied with the product, Laplante will grant an allowance on the sales price or agree to take the product back (although returns are rare, given the long-term relationship between Laplante and Lynch). Lynch expects total allowances to Lynch to be \(800. On October 16, 2017, Laplante grants an allowance of \)400 to Lynch because the color for some of the items delivered was a bit different than what appeared in the catalog.

Instructions

  1. Prepare journal entries for Laplante to record (1) the sale on October 2, 2017, (2) the granting of the allowance on October 16, 2017, and,
  2. Any adjusting required on October 31, 2017 (when Laplante prepares financial statements). Laplante now estimates additional allowances of $250 will be granted to Lynch in the future.
  3. Indicate the income statement and balance sheet reporting by Laplante at October 31, 2017, of the information related to the Lynch transaction.

Respond to the questions related to the following statements.

1. A wholly unperformed contract is one in which the company has neither transferred the promised goods or services to the customer nor received, or become entitled to receive, any consideration. Why are these contracts not recorded in the accounts?

2. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. Is this statement correct?

3. Elaina Company contracts with a customer and provides the customer with an option to purchase additional goods for free or at a discount. Should Elaina Company account for this option?

4. The transaction price is generally not adjusted to reflect the customer鈥檚 credit risk, meaning the risk that the customer will not pay the amount to which the entity is entitled to under the contract. Comment on this statement.
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