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Chapter 18: Q18-4P_3 (page 1043)

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.

Short Answer

Expert verified

Both sides of the journal totals$982,500.

Step by step solution

01

Definition of Inventory

The goods held with the final aim of selling them to customers are included in the business鈥檚 inventory. Inventory of the manufacturing business also includes raw materials and semi-finished goods.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

1 May 2017

Cash

$108,000

Unearned sales revenue

$108,000

1 July 2017

Cash

$486,000

Unearned sales revenue

$108,000

Sales revenue

$594,000

1 Aug 2017

Cost of goods sold

$280,500

Inventory

$280,500

$982,500

$982,500

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Most popular questions from this chapter

Hillside Company enters into a contract with Sanchez Inc. to provide a software license and 3 years of customer support. The customer-support services require specialized knowledge that only Hillside Company鈥檚 employees can perform. How many performance obligations are in the 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.

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?

When does a company satisfy a performance obligation? Identify the indicators of satisfaction of a performance obligation.

(Contract Costs) Rex鈥檚 Reclaimers entered into a contract with Dan鈥檚 Demolition to manage the processing of recycled materials on Dan鈥檚 various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex鈥檚 incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex鈥檚 also designs and builds receptacles and loading equipment that interfaces with Dan鈥檚 demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex鈥檚 and can be used for other projects. Dan鈥檚 promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex鈥檚 incurs the following costs: design services for the receptacles to interface with Dan鈥檚 equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan鈥檚 projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex鈥檚 Reclaimers revenue arrangement with Dan鈥檚 Demolition.

See all solutions

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